*Level 3's Next Stop (Barron's)
It's not likely to be bankruptcy, as cash outlook brightens; is Buffett buying its debt?
Review | Preview
Follow-Up: Cable Guy's Offer
We were brimming with optimism in our June 14, 1999, cover story, entitled "No Mercy," describing the prospects of the cutting-edge fiber-optic network company Level 3 Communications and its charismatic CEO, Jim Crowe. And the stock market seemed to bolster our thesis as Level 3 roared from around 70 at the time of our piece to an all-time high of over 130 in just nine months.
Then Level 3 got caught in the vortex of the collapse of the Nasdaq and the pricking of the Internet and telecommunications bubble. A horrible glut in both urban and inter-city fiber capacity sent rates of Level 3 and other transport companies for network access spiraling lower. Only some 3% of the U.S.'s fiberoptic lines honeycombing the country has since been "lit" for actual use. Worse yet, the dot.coms, e-commerce concerns, competitive local-access providers and other bandwidth users that Level 3 was counting on to fill its networks failed in droves. A nuclear-winter credit crunch descended on the telecom industry.
Level 3's stock has suffered mightily, falling some 95% in just the last year alone to under 4. Even worse, the company today is under a death watch.
Bloomberg.com recently speculated that Level 3 might be among the next telecom companies to file for bankruptcy, following the now well-trodden path of Winstar, Covad and 360 Communications to Chapter 11 land. Level 3's public debt is trading at around 40 cents on the dollar, implying not only that the stock will eventually be toast but that the company's $10 billion in state-of-the-art property, plant and equipment is worth considerably less that its total debt of $8 billion.
But reports of Level 3's demise seem greatly exaggerated. Jim Crowe of Level 3 points out that the company had approximately $4.5 billion in cash and available liquidity at the end of the first quarter. Second, the company expects to garner communications revenue of around $2.1 billion this year, $2.5-$2.6 billion next year and $3.6 billion in 2003. Along with capital spending cutbacks and overhead reductions totaling $2.3 billion over the next three years, Level 3 figures to achieve break-even in free cash flow by the beginning of 2004.
Walter Scott, the Omaha contracting billionaire who is chairman of Level 3, likewise betrays little in the way of concern. "With the cash we have, the company is hardly a Chapter 11 candidate," he avers to Barron's. "The business plan is working fine, and we continue to sign up important customers on a regular basis." Indeed, the likes of Microsoft, AOL Time Warner, France Telecom, Britain's NTL, Yahoo and Internet service provider Earth Link seem to have enough confidence in Level 3's staying power to ink major broadband carriage agreements with the company in recent months.
Scott has been putting his money where his mouth is. He recently infused some $50 million into a Level 3 unit, RCN Corp., and added some three million shares to his 35-million-share holding in Level 3 by purchasing the block from Jim Crowe for over $20 million.
Rumors continue to circulate in the debt market that Scott pal Warren Buffett has been loading up on Level 3's public debt. He's thought to have bought more than a billion dollars in face amount of that debt paying as little as 35 cents on the dollar. Sources say that Berkshire Hathaway bond trader Mark Millard has been the button man in the effort. Millard issued a curt "no comment" when Barron's queried him on the rumors. Marc Hamburg, Berkshire Hathaway vice president and treasurer, also would not comment.
Level 3's stock suffered analyst downgrades from Goldman Sachs and Credit Lyonnais Securities last week, now that the stock is selling deep in the hole. But David Barden of J.P. Morgan Securities, who downgraded the stock some months ago when it was selling at 15, takes a more measured view.
He thinks that Level 3 will be successful in replacing its now-defunct dot.com and e-commerce customers with broadband transport agreements with large corporations and major telecom companies. "The large enterprise market may only grow at 15% a year compared to the frothy expectations of 100% growth a year for the dot.coms, but I think that Level 3 will be able to execute this mid-air correction," he observes. He has an 18-month price target on the stock of 20.
-- Jonathan R. Laing |
