The Buffett Factor Revisited

October 8th, 2008 by · 7 Comments

Back in July I posted that big money might return to telecom in the form of enabling acquisitions.  Apparently I was much to early, the opportunities then seemed clear to me but they look petty and small compared to those in the current environment.  As the financial crisis deepens, it seems inevitable to me that the vultures will find value somewhere in the sector before long.

The last time was 2002-2003, it was the darkest time for telecom following the bursting of the tech bubble when Carl Icahn, Carlos Slim, Leucadia National, Wilbur Ross, Singapore, and Warren Buffett each came riding in on a white horse to save a company.  The risks were much higher then, every company in question was burning large amounts of cash whether in bankruptcy or not.  The glut was in full force, the business models looked horribly broken – yet they saw an opportunity.

Now, in the throes of this newest financial crisis we see much better bargains available.  The valuations are way down but the business models are looking increasingly solid, even healthy, even supply and demand are in balance.  The economics of fiber and data are much better understood now than they were during the bubble, it has become increasingly easy to value the assets and predict the cashflows various assets might generate.  We have already seen Buffett spend some money on GE and Goldman, seeing opportunity in their need for cash despite the risks of catching a falling knife.  Well, there is opportunity as well in telecom and I expect it will get noticed sooner or later.  Money is an enabler, and with the credit markets in a deep freeze it means the sector can’t take advantage of opportunities the way it otherwise would.  As prices fall, the prospect of enabling those opportunities becomes increasingly lucrative.

Level 3 (LVLT) for one will need to refinance some debt next year, and even if they manage to do so without issuing stock they would also probably like to do some M&A at these prices if they can.  Leucadia dropped LVLT stock like a hot potato after the Wiltel acquisition, but that was at over $3 with substantial cash burn.  At under $2 and generating positive cashflow, it may be an entirely different story.  Buffett doesn’t know tech, but it didn’t stop him from making good money on LVLT converts the last time.  A commenter here has already shown me evidence that Buffett’s General Re picked up a pile of LVLT bonds, certainly he is watching.

One could also see TW Telecom (TWTC) or even Global Crossing (GLBC) seeking some enabling cash for an acquisition in this environment.  Suppose Singapore took advantage of the situation and offered Global Crossing enough cash to solve their USA last mile problem?  Dilutive or not, both might win in that situation.  Such opportunities won’t go unnoticed forever.  There is plenty of smart money out there looking for a home, if the big money players found telecom to be an attractive place to make a buck in 2002 when the sky really was falling for telecom, can there be any question it might happen now?  The best opportunities come when someone doesn’t *need* the money but certainly could use it to great effect – low risk and high reward.

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Categories: Financials · Internet Backbones · Mergers and Acquisitions

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7 Comments So Far

  • toddforthree says:

    if i was buffett, i would buy a billion of bonds that are out there now and take the cds money as well. after you did that you would only have to spend 200m in cash to get a 5% position in lvlt and make a killing on the bonds and the stock as the lemmings follow the oracle. if you think thats nuts just keep in mind he did it once in 2002.

  • carlk says:

    Did Jim Crowe not already curse Buffett’s money as being too expensive during an earlier ASM?

    If your sniffer is more close to smelling correctly, then the price of any money considering the lack of factual “need” during this period; should be reasonably better than the last time.

    One must assume that Todd is suggesting he has been buying LVLT shares, too, as many as 100M, at the Morgan Stanley analyst’s targeted price of two bucks, representing 5 percent of the company’s fully diluted amount that is nearing 2B shares, representing a follow up to his bond buying spree.

    This would be a masterful approach to earning a nice return on that disastrous Merrill Lynch hedge as well. I do hope that, you’re both onto something.

  • Rob Powell says:

    Yes, Crowe did say that. But two things: 1) circumstances change, and 2) I’m not talking specifically about Level 3

  • Eric S says:

    I thought I would go through the anaylsis of what if these guys tried to pull a Sprint-Nextel(stock was at ~$3 when they started buying back their debt before it went on to be a 10 bagger). I think it would be an opportune time to do so given these credit dislocations.

    What has been pressuring the stock:

    They have $362 due in March.
    They have $901 due in 2010.

    Cash position:
    $666M end of 2Q.
    +5M(my estimate from ML hedge unwind)
    +$60M in 2H09.(my estimate, the Juice’s $35M in 3Q, I don’t know if I saw a 4Q number from him).
    +$70M in 2009 (neutral rated UBS credit analyst estimate).
    +84MM in 2010. (20% fcf growth from 2009->2010, this could be very conservative and the $70M base is likely low).
    +40M in reduced interest expense in 2009 from debt paydown on March 09 maturities.(using 9% interest rate)
    +$41M in interest expense saves in 2009 on the 2010 bonds.(interest rate is just 4.4%)
    +41M in interest expense saves in 2010 on the 2010 bonds. (interest rate is just 4.4%)
    $1,007M in cash

    Last print I saw on their bonds was $0.87 on the dollar. Assuming we see the credit markets continue to slide and we see the those bonds slide 7c on the dollar, Level 3 could wipe out all the dreaded ’09-10 maturities before debt maturities ratchets down until 2014(Buffet Bonds). At this point, they would just be $90M short by the end of 2010 assuming the fcf/ebitda growth does not improve from today’s muted expectations. In the least, being just 4x levered in 2010( a peer multiple of debt/ebitda) should give them the opportunity to refi the 2010 at a decent rate, especially given their asset position.

  • Eric S says:

    Given the credit market deterioration again today, I wanted to firm up those prices and have an important correction. While, their March ’09 bonds are trading at $0.875 for the march 2009 bonds, the others are trading cheaper. Here is a complete list of those prices:

    Par Value Price Dollars needed Maturity
    $362 $87.50 316,750,000 3/9/08
    $14 $106.30 15,200,900 10/9/09 $373 $59.50 221,935,000 3/1/10
    $513 $73.50 377,055,000 7/1/10
    $1,262 $930,940,900

    Therefore, with just $931M the company can retire all of that debt with a small cushion of $76M remaining based on the above assumptions.

  • Rob Powell says:

    Wow Eric, nice work! I could throw that into a post if you like…

  • Anonymous says:

    sure Rob…I think as the debt conversation becomes more important that math will be more relevant.

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