Level 3 and the Buffett Factor

July 7th, 2008 by · 24 Comments

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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Categories: Information · Internet Backbones · Mergers and Acquisitions

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24 Comments So Far

  • carlk says:

    Some have speculated that Warren owns a huge swath of underlying senior debt which he accumulated during the Junk Bond implosion in 2002. Why wouldn’t an exchange of 2B face value debt for 500MM in equity at $4 work out similarly, while enabling LVLT to catapult to significant FCFP via interest savings, and finance any pending acquisitions with new debt at similar rates to your 7 percent, with the ability to again, opportunistically refinance that down the road when market conditions became more favorable? FWIW, the fact that we’re fantasizing about this, makes the probability of such an event, highly unlikely. 🙂

  • Alfred J. Beljan says:

    **$2B of converts with a coupon of 7% and a strike of $4 (500M shares)**

    also sounds like a pretty good deal for current investors – why would not LVLT offer such investment opportunities to those who have retained faith in company longer than Buffett with his expensive, quick hit approach

  • skibare says:

    Given the current XOXO price and the “”‘Consolidation”’ that has already happenned in the space, NOTHING would surprise me and Warren ”bailing””’out his buddy Walter Scott again would make perfect monetary sense for Buffett since everything Buffett touches turns to Gold ………SEAM and Miller and the other 11 Amigos might want a piece of the PIE given the HIGH EQUITY ownership position of the Current 11 Amigos!

  • Dave Rusin says:

    Listen to Buffet, he buys on the downside BUT more importantly companies with stellar management.

    Does Level 3 have Buffet-type management?

  • Rob Powell says:

    Dave, I’d say that he surely felt Level 3 had Buffett-type management in 2002 the first time. As to whether he is still of that opinion, I guess that is the $64,000 question isn’t it? I don’t know.

  • Dave Rusin says:

    Rob, I believe the Buffet 2002 move was more about the Omaha Rich Boys Club doing a favor during a very turbulent time.

  • Alfred J. Beljan says:

    perhaps you should clarify that while Buffett invested $100 Million in LVLT and reclaimed that amount a year later, Longleaf invested $300 Million and has continuously left that amount invested in LVLT to this date but has increased its investment to 30% of LVLT equity

  • carlk says:

    The better question might be, whilst knowing what Warren has already said about Walter Scott and Jim Crowe in the past, how many times has Warren E. Buffett gotten the human side of the equation wrong, for businesses that he considered to be healthy in the long term, assuming that he believed today, LVLT was a healthy long term business?

    If we weren’t going to be able to find out because of a “retracted statement” surrounding the character of the men he commented so nicely about in the past, then we’ll definitely find out if his actions through the use of his valuable capital becomes available to LVLT again, as Rob is hypothetically suggesting. I am willing to wait another nine or ten days in order to test Rob’s theory, at least in the short term, regarding GLBC and a Buffett infusion of capital, prior to criticizing such lunacy which I myself engages in all the time as a LVLT share owner. 🙂

  • DenverLion says:

    The biggest gating item for Buffet/Berkshire is that any investment requires a consistent cash payback given cash requirements of Berkshire (insurance). That is why he liked the LVLT bonds so much – he felt strongly it was cash flow good, especially at YTW’s in the high teens/low 20s. Level 3 stock does not meet this requirement.

  • carlk says:

    Are there not any “non dividend,” or very small percentage dividend paying companies in the stable of Berkshire owned publically held names which insurance float can be used for?

    Other than dividends, holding stock as “equity” for decades doesn’t provide one any cash from public names.

    During the first capital infusion, there was talk about legal impediments which prevented “preferreds” from being offered, as is a Warren favorite vehicle due to corporate tax law and partial exemptions.

    What’s the status on being able to issue preferreds in this company today?

  • Herb Luria says:

    LVLT stock has never really recovered from Buffet’s exit (once that became known in early ’04). I believe all forces should try to get AT&T to buy this company and put everybody associated with it out of our eternal misery, using the argument to AT&T that if they don’t buy it they will miss their best and maybe last chance to return to their former status of world’s supreme communications company.

  • Loren says:

    This is intresting

  • carlk says:

    We keep hanging around Buffett’s 2002 convert price of $3.41? Just a coincidence, or hmmm…..

    InvestorVillage site has been a mess a long time now, inclusive of NO ACCESS all day long.

    The Kidd’s mail box is FULL too, and one can’t even leave him a message to tell him how “Blue” they are.

  • Rob Powell says:

    Yes, IV seems to have crashed – hopefuly they will get it repaired ASAP.

    As for the $3.41, since those bonds no longer exist I would definitely have to chalk it up to coincidence.

  • carlk says:

    Can you be certain it’s not a real entry price by him for straight “equity” at this juncture in the LVLT business plan?

    On an aside, what about “preferreds” being issued at this time?

    The stock looks like a DEER with the HEADLIGHTS having been shone upon it.

  • Rob Powell says:

    Nobody can be certain about anything, but I don’t see why the pricing on a convert from 5 years ago would have any particular relevance other than perhaps some sentimental value.

    The company is in a position where positive results should have a material effect on their ability to raise money. If they were to go out now at these prices and raise that money, it would imply that those positive results aren’t as near as some might hope.

  • carlk says:

    Is that how institutions like BRK build equity stakes in companies?

    Or, do they look at the market cap that 3.41 represents, or approx. 5.4B and measure that against the long term opportuntities from a positive free cash flow, and/or other metrics like BV perspective?

    Certainly, the BV could change rapidly, as cash flows begin migrating to the gross factory plant, post Unity.

    The question here, Rob, is whether or not it’s possible that Buffett likes LVLT, today, at 5.4B in straight equity, and is buying in the open market directly from “Mr. Market”?

    Whether or not that decision is dovetailing with 3.41, is only less important, because the share count has changed dramatically since the last time he climbed aboard.

    Stated differently, one like Buffett would be paying more for equity at this juncture, than he valued it in the past.

    Equity, mind us, is still about 90 percent of net debt on the balance sheet, i.e., still discounted from a PAR comparison.

    P.S. IV has some serious server problems, apparently. Do you know their ISP?

  • level3 says:

    Try this on for reach, scope, and scale:

    James Q. Crowe is Chief Executive Officer of Level 3 Communications and future CEO of Berkshire Hathawy.

    This would make a percet fit, that all LVLT shareholders would be happy with. Walter Scott Jr. said hold your LVLT share and you’ll be happy. (enthusiastic ) As we all know Walter Scott has had a great deal of exposure to James Crowe and admires his managerial and human qualities.

    “Your Board is equally enthusiastic about my successor as CEO, an individual to whom they have had a
    great deal of exposure and whose managerial and human qualities they admire.” – Warren Buffett February 25, 2012

    Warren Buffett, chairman of Berkshire Hathaway, issued the following comment on his company’s investment in Level 3: “Liquid resources and strong financial backing are scarce and valuable assets in today’s telecommunications world. Level 3 has both. Coupled with the management of Walter Scott and Jim Crowe, in whom I have great confidence, Level 3 is well equipped to seize important opportunities that are likely to develop in the communications industry.” – Jul 8, 2002

    • Rob Powell says:

      Ummmm, when I suggested that you to stop snorting the kool aid powder directly, I didn’t mean you should move onto something actually hallucinogenic… Please note, everyone, that this is a very old post being commented on. 🙂

    • Give me a break says:

      WTF? L3 PR flacks should find a better way to pump their company than dragging out old news to game the comments board. God knows that finding news that reflects very poorly on L3 would not be hard on this site, or any other site, for that matter. Pump away, but at least do it in a topical way.

  • CarlK says:

    Robert, I do want to apologize to your board for being bothered by that “Level 3 Disaster” comment according to what I coined as a BasherCYST on the CLWR call yesterday.

    Someone who I believe is from Wall Street on another venue, and one who is very bright, and articulate while always being respectable, convinced me that the comment was perfectly placed and with or without CONTEXT was a damn good question to ask!

    Let’s just hope this “DISASTER” I call, “Big (3),” is readying to turn into a “DARLING” sooner rather than later! 🙂

  • CarlK says:

    What’s this? Warren E. Buffett puts on his Stillettos in order to PUMP the HOUSING MARKET, directly and indirectly talking his BOOK, and devout, long term owners of (3), men and women alike who have been exploited and abused by Wall Street Traders, many times using illegal means to destroy value in the trading pits, can’t speak intelligently about how The Oracle looks at businesses by way of MARKET CAPS and RETURNS in order to VALUE?

    There was one other thing acknowledged by those Wall Street scam artists on CLWR’s call the other day, which is a REASON to COMPLETELY GUT Wall Street and start anew. Send these overpaid scam artists with their PINK SLIPS to find more USEFUL EMPLOYMENT!

    The Deutsche Bank analyst prefaced his comment by stating something to the effect that, we are confined to looking at short term or “quarterly results,” yada, yada, yada!

    What BUSINESS on GOD’s GREEN EARTH should be expected to meet such LIMITED time FRAMES in order to find success, and ultimately FLOURISH?

    Wall Street FAILS MISERABLY at doing exactly what they’re supposed to do, that being, capitalizing and building businesses that advance quality of lives across the globe inclusive of the patience necessary in “creating” success.

    THE PUMP IS ON!!!!!!!!!!!!!!!

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