My last post suggested that big money might revisit the telecom space. This time let’s look at the relationship between Warren Buffett and Level 3. Tomorrow is the 6 year anniversary of Buffett’s cash infusion, where alongside Longleaf and Legg Mason he invested $100M in convertible bonds. At the time, all the other nextgen backbones were falling like dominoes, Global Crossing and Wiltel were already in BK court, Genuity was sinking fast, Broadwing and Cable & Wireless were frantically planning amputation. Against this backdrop, Level 3 was taking extreme measures to avoid breaching financial covenants on its debt. The Buffett $100M did more than just add a bit of cash, it lent his good name for a while – and that combination got Level 3 past a tough spot. Of course, it was expensive money, and Buffett quickly cashed out with nice profit.
It is often said that Buffett won’t invest in tech, but he did, and he did so successfully. He risked little, and gained a substantial profit in a short period of time while the rest of us just blinked – I’d say he understood the situation quite well. Some say it is only because of the relationship between Buffett and Level 3 Chairman of the Board Walter Scott, but relationships drive more of the movement of money than the markets often acknowledge. And I think that time may be approaching again.
For instance, in past posts I have speculated about a takeover of Global Crossing by Level 3. While strategically very attractive, such a deal is severely limited by funding right now and the debt markets are very difficult. Suppose Warren Buffett were to come in and offer to buy $2B of converts with a coupon of 7% and a strike of $4 (500M shares) to enable such a deal? If a substantially accretive M&A can't happen any other way and the window of opportunity is narrow, I could easily see Level 3 seriously considering such an offer as long it is with someone they feel they could work with.
What is in it for Buffett? If he didn’t stay the last time, why would he re-enter? The bandwidth marketplace is much better understood now, it isn’t such a big gamble anymore. You don’t have to know how it will happen to know that demand for bits isn’t going away and those who supply them will be in a favorable spot for the next decade if they are sufficiently funded. And with the debt markets in their current state, a sweetheart deal like those Buffett prefers is more reasonable than it has been since the last time. So again, what is in it for Buffett? A fantastic return on his investment, of course.
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