Buffet and friends sub Level 3 $500m for acquisitions

Chap 11 to predator in 60 seconds...

ComputerWire: IT Industry Intelligence

Level 3 Communications Inc sees itself as the company best placed to carry out a wide-ranging consolidation among global carriers after raising $500m in bonds from a group of corporate investors including Berkshire Hathaway, which is chaired by Warren Buffet. This gives the Broomfield, Colorado-based company $1.5bn to build a worldwide communications empire.

While a confidante of Microsoft Corp's chairman Bill Gates, Buffet has maintained his position as one of America's wealthiest citizens by holding a strong distrust of technology stocks. Many derided the "Oracle of Omaha's" views as old-fashioned, but recent stock market trends have upheld his judgement.

What he sees in Level 3 is clearly geared to the company's potential, rather than past performance, but it will not have escaped his notice that it is sitting on $1.1bn in cash and equivalents at a time when many of its peers are in Chapter 11 protection against their creditors and can be picked up for peanuts.

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

Level 3's shares leapt 59.5% to $4.61 on the news, showing that Buffet's magic is already doing its work as the company is already in a strong position to use its paper to help finance acquisitions. And the new bondholders are already up on the deal as their 9% notes are convertible into common stock at any time at a price of $3.61.

Level 3 CEO James Crowe said the ongoing shakeout in telecoms is creating "extraordinary opportunities" as companies, their network assets and customer bases become available. "We are fortunate to have both network management expertise and financial dry powder, which will allow us to continue pursuing opportunities that create value for our stockholders," he said.

One of the other major investors, Bill Millar of Legg Mason Funds Management, said that demand for telecoms services continued to grow at a time when the number of service providers was shrinking. "Spending on communications services is non-discretionary," he said.

Level 3 has a far from impressive financial record, and in the first quarter of this year to March 31 recorded a net loss of $90m, down from a loss of $535m on revenue of $386m, down from $448m.

In February, Level 3 was forced to deny that it might be forced to seek Chapter 11 protection as it acknowledged that it might violate a financial covenant with its bondholders later in the year. It said it had begun discussions with JP Morgan Chase, the administrative agent for its senior secured debt facility, to "assess modifications."

Level 3 has bought two software resellers this year: Software Spectrum Inc and Corporate Software Inc in moves that it justified by the trend to buy software functionality and data storage as a commercial service accessed remotely over broadband networks. But there is little doubt that its main motivation was to increase revenue and remain in compliance with covenants with its bankers.

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