Leap Wireless has turned down MetroPCS’ merger proposal, saying the operator is offering too little, but the Leap board hinted it was definitely interested in the deal of MetroPCS if the company would reach a little further into its pocketbook.

In a letter sent Sunday addressed to Metro Chairman and CEO Roger Linquist, Leap President and CEO Douglas Hutcheson said the Leap board voted unanimously to reject Metro’s offer, saying the company’s stock swap proposal—which would have converted every 2.75 shares of Metro stock into 1 share of Leap stock and left Metro shareholders in control of the company—didn’t take into account Leap’s growth prospects and undervalued Leap’s business relative to MetroPCS’s.

“As you know, we have long thought and have publicly stated that there could be merit in a strategic combination of our two companies,” Hutcheson said in the letter. “Your publicly announced merger proposal, however, is completely inadequate in a number of critical areas.”

Hutcheson then went on to name those areas and in the process outed some operational problems Metro is having in some of its new markets. Specifically Leap highlighted its success in building out the markets using PCS spectrum it acquired in the FCC’s Auction 58 more than two years ago, while pointing to problems Metro has experienced in launching in Los Angeles using licenses acquired from the same auction as well as difficulties it will have in launching service in New York, where it just won a sizable 700 MHz license in the AWS auction.

“We have concerns about your ability to successfully grow your business in line with shareholder expectations,” Hutcheson said in the letter. “We believe that much of your near-term performance will depend on the your market launches in Los Angeles and New York City. In Los Angeles, we understand that you have experienced delays and may be launching service under the license you won 30 months ago with a near-term footprint different from what you had originally intended. With respect to the license you won 12 months ago for New York City, we understand that market to be one of the most difficult to build and most competitive to penetrate, which are considerable hurdles in light of current markets expectations that you will successfully launch service within the next 12 to 18 months.”

And to top off Leap’s rebuke, Hutcheson claimed MetroPCS had only recently begun to contemplate offering mobile broadband services while Leap has been pursuing mobile data aggressively. Not coincidentally Leap announced its first PC card-based broadband data service today, selling data access in three markets that have been upgraded to CDMA 1X EV-DO: Nashville, Tenn., and Albuquerque and Sante Fe, N.M. Called Cricket Wireless Internet Services, the new launch mirrors Leap’s voice business plans, offering unlimited access for a set monthly fee ($40 a month, $35 with Cricket voice plan) within the local market. And like many of Leap’s cellular plans, the service undercuts prices many of the nationwide carriers are offering.

While Leap found numerous faults with Metro’s offer, the financial community reaction to Leap’s rejection was mixed. Raymond James Associates downgraded Leap, saying that while its analysts weren’t surprised at Leap’s response, they were surprised at the public spectacle Leap made of it. The equity research firm said it expected Leap to respond in private in order to elicit better terms through negotiation. Furthermore the Raymond James’ research note said tone of the rebuttal would it make it difficult for the two companies to reach an agreement before the upcoming 700 MHz auction, critical to both companies expansion plans.

Lehman Brothers Equity Research’s Brett Feldman was more optimistic that an amicable deal can be reached soon. “This is not a final rejection, but the next volley in what we expect to be continued negotiations,” Feldman said in a research note. “In our view, a deal between these companies is still likely. More specifically, we believe that a deal will be reached prior to Thanksgiving, which is when we expect applications to be due for the 700 MHz auction.” Feldman added that the two are probably not too far off in their negotiations, saying if Metro ups its offer to a little more 3 shares of Metro PCS stock--from 2.75 shares--the two carriers will probably have a deal.

For now, the two companies seem to waging a public relations war to make their cases directly to Leap’s shareholders. Metro issued a response to Leap’s rejection expressing not only disappointment but accusing Leap’s board of ignoring the wishes of its stockholders. “The contacts we have had with a number of Leap's shareholders indicate that they want to see a combination of our two companies happen without unnecessary delay,” Linquist said in the statement. “It appears that Leap's Board is ignoring the will of its shareholder base.”