MetroPCS, Leap up on proposed $5.5 billion merger; NovaStar slides 15% after dropping rights offering

By Sheri Kasprzak

New York, Sept. 4 - As the stock market cranked back up after the Labor Day weekend, a new merger plan emerged that would create the nation's fifth-largest wireless carrier.

MetroPCS Communications, Inc. saw its stock climb on Tuesday after the wireless communications provider sent a letter to Leap Wireless International, Inc. proposing a stock-for-stock combination.

The possible deal was lauded by both analysts and sell-side traders on Tuesday morning as positive for both MetroPCS and Leap. The management of MetroPCS noted in its letter to Leap's board that several analysts have previously commented on the potential benefits of such a transaction.

Meanwhile, shares of NovaStar Financial, Inc. fell by more than 15% after the residential lender and mortgage portfolio manager said its planned rights offering of $101.175 million of 9% series D-2 mandatory convertible preferred stock will be a no-go.

MetroPCS, Leap up

News of a planned merger between MetroPCS and Leap Wireless sent shares of both communications companies way up on Tuesday.

Pre-market, MetroPCS's stock gained $2.05, or 7.51%. At 1 p.m. ET, the stock was higher by $1.36, or 4.98%, and by the end of the day, the stock had climbed 4.98%, or $1.36, to end at $28.65 (NYSE: PCS).

Volume also took off, with 7,218,086 shares traded on Tuesday compared with the average 1,211,900 shares.

Meanwhile by 1 p.m. ET, Leap's stock had already jumped 15.75% or $11.42. The stock went home with a gain of $10.97, or 15.13%, to round out the day at $83.47 (Nasdaq: LEAP).

Volume of Leap's shares also soared on Tuesday with 6,385,678 shares changing hands compared to the average 1,159,220 shares.

Under the terms of the planned $5.5 billion merger, each share of Leap will be exchanged for 2.75 shares of Dallas-based MetroPCS, for a value of $77.89 for each share of Leap stock. The share price is a 23.1% premium to the trailing 20-day volume-weighted average price of Leap's stock for the period ended Aug. 31.

"It is a really great plan," said one sell-side trader on Tuesday morning. "It's already moving the stock, on both ends. It will really create real value and investors already are realizing that."

One analyst said the move makes sense from both sides.

"On the one hand, this is the move MetroPCS needed to gain that extra bit of market penetration," he said. "On the other, Leap needed this shot in the arm to even compete in this industry."

Combination pushed by insiders

The merger, according to MetroPCS chief financial officer J. Braxton Carter, would mean that MetroPCS shareholders would own 65.4% of the combined company with Leap shareholders owning 34.6%.

"We believe a combination of Leap Wireless and MetroPCS is compelling and would yield substantial, immediate benefits to the shareholders of both companies," said the letter to Leap's board of directors from MetroPCS. "Institutional shareholders of both our companies, as well as the Wall Street research community, repeatedly have articulated their desire to see a business combination between our two companies announced before the end of 2007. MetroPCS has carefully considered these views and believes such a combination would generate substantial value for both companies' shareholders and other stakeholders."

MetroPCS's chief executive officer Roger Linquist said in a statement released Tuesday morning that the combination is "compelling" and "will create significant value for stakeholders of both companies."

"The combined company will create a new national wireless carrier with licenses covering nearly all of the top 200 markets in the United States," Linquist said in the statement.

"The shareholders of both companies will have the opportunity to participate in the upside potential of the combined company and our respective employees will benefit from being a part of larger, more diversified organization. We are excited about the prospects this opportunity creates and plan to work diligently to enter into a transaction quickly."

NovaStar's shares slide

Elsewhere, NovaStar Financial's stock slipped after the mortgage portfolio manager said it will not move forward with its previously planned $101.175 million rights offering of 9% series D-2 mandatory convertible preferreds.

The announcement sent shares of NovaStar down 15.67%, or $1.33, to finish at $7.16 (NYSE: NFI).

"It's really a function of the credit crunch we're in," said one sell-side trader on Tuesday.

Kansas City, Mo.-based NovaStar confirmed that much in its statement released Tuesday.

"As disclosed in NovaStar's form 10-Q for the quarter ended June 30, 2007, several conditions and events have adversely impacted the subprime mortgage industry and NovaStar's operations, liquidity and financial condition," said the statement.

"For example, as previously disclosed, Moody's Investor Services downgraded NovaStar Mortgage, Inc.'s servicer quality rating and additional concerns have developed about NovaStar's ability to remain in compliance with certain covenants contained in its financing agreements.

"Further, on Aug. 20, 2007, motions for a judgment notwithstanding the verdict and a new trial were denied in the previously disclosed California case in which NovaStar's subsidiary, NovaStar Home Mortgage, Inc., had a $46.1 million judgment entered against it.

"Further, due to the overall deterioration in the subprime mortgage industry and the secondary capital markets for subprime mortgage loans during 2007 NovaStar made the decision to suspend its wholesale originations and curtail its retail originations to preserve liquidity."

"With today's action, we are pulling back to focus on NovaStar's core strengths and preserve liquidity," said Scott Hartman, chief executive officer of NovaStar, in the statement.

"Over the year, we have generated economic value primarily through managing our portfolio to generate net interest income while mitigating risks and accessing capital in the secondary market."

Had the rights offering gone forward, the preferreds would have been convertible at $28.00 each.

The rights offering was planned as part of NovaStar's sale of $48.8 million in 9% series D-1 preferred stock to affiliates of MassMutual Capital Partners LLC and funds managed by Jefferies Capital Partners IV LLC.

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