Buffet lends to Level3

pms laflame at aaahawk.com
Mon Jul 8 12:33:48 PDT 2002


Speaking of "good loans in bad times":

Monday July 8, 2:40 pm Eastern Time Reuters Business Report Warren Buffett, Others Invest in Level 3 By Sinead Carew and Bill Rigby

NEW YORK (Reuters) - Billionaire investor Warren Buffett made his first move into the technology sector on Monday as he and two other investors bought $500 million of bonds issued by money-losing fiber-optic cable firm Level 3 Communications Inc. (NasdaqNM:LVLT - News) ADVERTISEMENT

The deal marks a watershed for Buffett, one of the most influential U.S. investors, who avoided technology and communications investments -- even when they were hot -- despite occasional pleas from shareholders of his Berkshire Hathaway Inc. (NYSE:BRKa - News)

Buffett, the world's second-richest man, continually said he would not invest in areas he did not understand or where he could not identify long-term winners.

Buffett's tough investing criteria were met by Level 3, whose chairman, Walter Scott, sits on Berkshire's board.

"Liquid resources and strong financial backing are scarce and valuable assets in today's telecommunications world," Buffett said in a statement. "Level 3 has both."

Level 3 is looking to use the money to take customers from troubled long-distance and local phone operators, Level 3 Chief Executive James Crowe told Reuters in an interview.

"We already have a network we think goes to the right places and is constructed correctly," Crowe said: "So we're more interested in acquisitions which bring customer bases to our networks."

News of Buffett's backing sent Level 3 shares soaring as much as 66 percent in morning trade, making it the most heavily traded stock on Nasdaq. Its shares fell back to $4.44 later in the day, up 53 percent from Friday's close.

Other telecommunications stocks, such as Qwest Communications International Inc. (NYSE:Q - News), also rose on hopes Buffett's move may attract other investors back to the sector.

MONEY FOR ACQUISITIONS

Under the deal, Buffett and money managers Longleaf Partners Funds (Nasdaq:LLPFX - News) and Legg Mason Inc. (NYSE:LM - News) will buy $500 million of Level 3 debt to allow the cable carrier to make acquisitions.

Broomfield, Colorado-based Level 3, will sell the investors 10-year bonds yielding 9 percent interest that can be converted into Level 3 stock at any time if the investors choose.

Longleaf will buy $300 million of the debt, while Berkshire and Legg Mason will buy $100 million each.

The deal is a boon for Level 3, coming as the telecommunications industry unsettles investors with accounting scandals, oversupply of capacity and disappointing demand.

Level 3 is now looking to buy rivals' assets and capture their customers, taking advantage of oversupply of fiber-optic cable.

"We invested in Level 3 to take advantage of consolidation opportunities," said Longleaf adviser O. Mason Hawkins, chairman and chief executive of Southeastern Asset Management. "We believe these opportunities are substantial."

The investment could touch off consolidation in the sector, Level 3 CEO Crowe said.

"The telecommunications industry is going through a period of unprecedented turmoil," Crowe said. "The shakeout is creating extraordinary opportunities as telecommunications companies, their network assets and customer bases become available."

ANALYSTS LIKE THE DEAL

Analysts warmed to the deal.

"To the extent it (Level 3) can pick up customer lists with good credit-quality customers, that's a good thing," Credit Lyonnais Securities analyst Rick Grubbs said, "as long as there's not more debt coming with it."

An acquisition of another telecommunications company would increase the company's already high debt levels, warned Grubbs, who said Level 3 already has enough network assets. Level 3 has almost $6 billion in long-term debt.

The price of Level 3's other corporate bonds jumped as much as 15 points on Monday's deal, traders said, but the firm's debt is still rated as "highly speculative," or junk, by Moody's and Standard & Poor's.

The best possible scenario would be for the investors to convert the notes into equity as soon as possible, Grubbs said, so Level 3 would not have to pay interest on the bonds.

Berkshire's class A shares were up $400, or 0.6 percent, by mid-afternoon, to $68,400 on the New York Stock Exchange.

Omaha, Nebraska-based Berkshire, which focuses on insurance and owns 50 or so old-economy firms, holds about $29 billion in stocks and $36 billion in bonds.

----- Original Message ----- From: pms <laflame at aaahawk.com> To: <lbo-talk at lists.panix.com> Sent: Monday, July 08, 2002 12:55 PM Subject: Re: source


> Never mind. Thanks.
> ----- Original Message -----
> From: Doug Henwood <dhenwood at panix.com>
> To: lbo-talk <lbo-talk at lists.panix.com>
> Sent: Monday, July 08, 2002 11:55 AM
> Subject: source
>
>
> > The PIMCO commentary is at
> > <http://www.pimco.com/bonds_commentary_fed_focus_0702.htm>.
> >
> > Doug
> >
>
>



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