Private placement activity remains mostly light; Level 3 Communications raises $880 million

By Sheri Kasprzak

Atlanta, Feb. 22 - As stocks took a dive Tuesday, private placement volume remained relatively low, even as Level 3 Communications Inc. brought an enormous direct offering.

"There aren't many companies coming out with deals today," said one market source. "Of course, [Level 3] seems to be stealing the show with its offering. But I suspect it's just stocks keeping volume lower today."

On Tuesday, the Dow Jones Industrial Average sank 174.02 to close at 10,611.20; the Nasdaq composite index ended the day down 28.30 at 2,030.32 and the S&P 500 closed out 17.37 lower at 1,184.22.

In Canada, some sell-siders there said volume is being controlled by oil, gold and other commodities.

"In Canada, as normal, it follows the commodity, so [I] would expect to see some deals," said one Canadian sell-sider.

Oil prices jumped $2.80 Tuesday to close at $51.15 per barrel.

Leading news in a big way was an $880 million direct offering from Level 3 Communications Inc.

Seven institutional investors bought convertible senior notes at an 86.5% premium to market price.

The notes mature in 2011, bear interest at 10% annually and are convertible, beginning Jan. 1, 2007, at $3.60 each.

Southeastern Asset Management, Davis Selected Advisers LP, Fairfax Financial Holdings, Legg Mason Opportunity Trust, Markel Corp., MSD Capital LP and The Torray Cos. purchased the notes, which are being sold under Level 3's shelf registration.

Legg Mason has the right to terminate its commitment if the Investment Company Act of 1940 prevents its participation, a determination that could be made in a week. If this occurs, the proceeds from the offering will be $780 million.

A sellside observer of the Level 3 transaction announced Tuesday commented that the convertible placement "would boost [Level 3's] cash to $1.6 billion and provide [a] war chest for acquisitions."

"The conversion price represents an almost 100% premium to current levels, suggesting strong conviction in stakeholders, which include some of the most successful investors on the Street," the sellsider added.

"We have always held LVLT is a creeping restructuring that will culminate in substantially more shares as the company deleverages, accepts large VoIP [voice over internet] contract wins and M&A of industry peers (potentially WilTel within LUK, the former MCI Internet backbone now within Savvis, or the dial-up operations of MCI itself) to provide scale that LVLT needs as it deploys VoIP to offset attrition at major dial accounts like AOL and the DSL aggregation business at Verizon."

Last November, in its last of four previous convertible offerings, Level 3 sold $320 million of seven-year convertible notes at par to yield 5.25% with a 20% initial conversion premium but through using a portion of those proceeds to enter into bond hedge and stock warrant transactions to limit dilution from the conversion of the notes it boosted the effective conversion premium to 80.7%.

As a result of the deal announced Tuesday, Level 3 junk bonds shot up as much as 7 points while its other four convertible issues were marked up 5 to 10 points. Level 3 stock also gained as much as 23% on the news. However, during the course of the session, all the Level 3 securities came off those high points reached mid-morning, shortly after news of the latest financing event.

Level 3's stock closed up $0.35 at $2.28.

"Telecommunications is going through a period of unprecedented consolidation, one that we expect will generate real opportunities for Level 3," said James Crowe, the company's chief executive officer in a statement. "In such an environment, strong financial support and access to capital are of critical importance. We're pleased to have signed these agreements, as we believe they reflect a fundamental level of confidence in the company, our business plan and our competitive position within the industry."

O. Mason Hawkins, chairman and chief executive officer of investor Southeastern Asset Management said Level 3 was appealing because it has established itself as a communications provider.

"The company has also succeeded as an industry consolidator through its acquisition of Genuity and other telecom assets," Hawkins said in a statement. "We believe the company is well positioned to capitalize on additional opportunities as they arise."

Based in Broomfield, Colo., Level 3 is a communications and information services company providing wholesale dial-up service to internet service providers. The proceeds from the offering will be used for general corporate purposes, possible acquisitions, working capital, capital expenditures, debt refinancing and debt repurchases.

Level 3 a "vulnerable suitor"

For more than a year, Level 3 has been making acquisitions, said a buy-side source in the convertible market, but its latest financing effort seems to cement a view that amidst consolidation in the telecom industry the company will be pursuing more opportunities rather than be a target. Yet at the same time, he added, the company is eliminating its anti-takeover poison pill package, a move that would seem to make it more vulnerable.

"Of course, an unsolicited bid could always pop up with regard to Level 3, and the company has said all along that it is an acquirer, but this just seems to be a more solid indication that they are seriously looking," the convertible fund manager said. "Doing away with the poison pill is interesting, it does mean they could be maybe looking at a more sideways acquisition [of an equal or similar company], but I don't think it necessarily means the company has put a 'for sale' sign out."

Crowe, Level 3's chief executive, said the company had been considering the elimination of the officers and directors stock option plan for the past year, and "after careful consideration, we have concluded that doing so is in the current interest of the company and its stockholders."

Level 3 said it intends to use proceeds from the 10% convertible for general corporate purposes, including possible acquisitions, working capital, capital expenditures, debt refinancings and debt repurchases.

Flow raises $65 million

Flow International Corp. said it is expecting to rake in $64,999,991 in a private placement.

The company sold 17,473,116 units at $3.72 each to institutional investors.

The units include one share and one tenth-share warrant. The whole warrants allow for an additional share at $4.07 each for five years. If the warrants are fully exercised, they will bring in an additional $7 million in proceeds.

"The success of this PIPE demonstrates the market's overwhelming endorsement of our accomplishments over the past two years and our documented long-term strategy," said Stephen Light, Flow's president and chief executive officer.

"While we are adding approximately 17 million shares, which may dilute our existing shareholders, we believe the reduction in Flow's debt position will allow us to operate a robust and profitable company focused on our ultra high-pressure water pump core, thereby increasing long-term shareholder value."

Based in Kent, Wash., Flow develops and manufactures high-pressure water jet technology equipment used for cutting, cleaning and food-safety applications. The proceeds will be used for debt repayment.

Flow's stock closed down $0.26 at $4.02 on Tuesday.

ViryaNet closes $1.3 million deal

ViryaNet Ltd. wrapped up a $1.3 million offering, the company said.

The company sold 581,659 shares at $2.29 each to one of its current shareholders, Telvent Investments S.L.

"Telvent remains committed to the success of ViryaNet, and we value them both as an investor and as a partner," said Paul Brooks, ViryaNet's president and chief executive officer in a statement. "Telvent's confidence in and commitment to ViryaNet validates our strategic vision. This funding will help us capitalize on our growth initiatives."

ViryaNet, based in Southborough, Mass., is a software applications provider focused on technologies that combine the internet and wireless technologies for workforce scheduling, dispatching and activity reporting.

The company's closed down $0.01 at $2.35 Tuesday.

Discovery Lab's stock drops

The same day the company announced its plans to raise an additional $2.6 million in its previously announced $26.5 million direct offering, Discovery Laboratories, Inc.'s stock dipped.

The company closed down $0.26 Tuesday to end at $5.86. On Feb. 18, when the deal was originally announced, Discovery's stock lost $0.37 to close at $6.12.

The offering includes stock sold at $5.74 each to institutional investors.

Discovery, based in Doylestown, Penn., is a biopharmaceutical company focused on respiratory disorders.

Smith Micro's stock dips

After wrapping a $22.4 million private placement last week, Smith Micro Software, Inc.'s stock took a dive.

On Tuesday, the company closed down $0.35 at $6.40. On Feb. 18, when the closing was announced, its stock closed down $0.73 at $6.75.

The company sold units at $6.40 each.

Based in Aliso Viejo, Calif., Smith Micro develops and markets wireless communication, broadband, eCommerce and utility software products.

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