Level 3 gets $500 million cash infusion for acquisitions

By Ronda Fears

Nashville, Tenn., July 8 - Level 3 Communications scored a major coup Monday with the private sale of $500 million of convertible notes to Berkshire Hathaway, Legg Mason and Longleaf Partners during the turbulent times that have beset the capital markets.

More interesting, perhaps, though is the company's plans for the new cash - acquisitions. Level 3 CFO Sureel Choksi said the new money brings the company's cash position to $1.5 billion.

"We think there are lots [of acquisition opportunities]," said Level 3 CEO Walter Scott, on the company's conference call about the placement.

"I'm not going to get any more specific than that right now."

But, Scott did add that there are several telecom companies in bankruptcy or near bankruptcy that would offer opportunities to purchase assets selectively, and at bargain prices.

Level 3 sold $100 million of the new notes to Berkshire Hathaway, $300 million to Longleaf Partners and $100 million to Legg Mason. All three investors have agreed to consider investing more in the future, without obligation.

The notes have a 9% coupon and 18% initial conversion premium.

At conversion, based on the current conversion price, which could be adjusted if the company issues stock at a lower price, Choksi said the three investors would own a 27% stake in Level 3.

The company wanted to issue a mandatory convertible preferred, Choksi said, but that was not possible under the company's current debt agreements. However, he said, plans now are to convert the notes into a mandatory as soon as possible, or some alternative convertible security.

The news boosted Level 3 shares and existing convertibles, which have been extremely depressed.

"This was a major deal," said a convertible dealer.

"What makes this so remarkable is the caliber of investors they signed up for this new issue. This is a departure from Warren Buffett's position to steer clear of telecom and dotcoms. That's a big, big deal."

Level 3 shares rose $1.47 to $4.36. The 6% convertibles due 2009 and 6% convertibles due 2010 were both quoted 1 point higher at 31 bid, 35 asked at one shop. Another shop quoted the 2009 issue at 29 bid, 31 asked and the 2010 issue at 28 bid, 30 asked.

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

The telecom industry has scared off many investors due to accounting scandals, oversupply of capacity and disappointing demand, which Crowe said provides opportunity for those with prowess and capital backing.

"We invested in Level 3 to take advantage of consolidation opportunities in the telecommunications arena," said Longleaf adviser O. Mason Hawkins of Southeastern Asset Management.

"We believe these opportunities are substantial."

The telecom downturn of the past couple years has created some opportunities for acquisitions, as struggling telecom firms, network assets and customer bases become available, said Crowe.

"It is widely recognized that the telecommunications industry is going through a period of unprecedented turmoil," Crowe said.

"At the same time, however, the ongoing shakeout is creating extraordinary opportunities as telecommunications companies, their network assets and customer bases become available."

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