Is Buffett Making a Play With Level 3?
omaha.com
BY STEVE JORDON
WORLD-HERALD STAFF WRITER
Bond traders and some investors are guessing that Warren Buffett's investment company, Berkshire Hathaway Inc., has bought a large amount of corporate bonds issued by Level 3 Communications Inc.
Even if reports of such a purchase are true, the implications for Level 3 shareholders are unclear.
Warren Buffett
It could signal that Buffett believes Level 3 will be successful in the long run and that the bonds will gain in Buffett value. Or it could mean that Buffett believes the bonds, which are selling at a discount, are a good buy even if Level 3 does poorly.
Level 3's fate has been the subject of intense speculation in the Omaha area, especially because thousands of people have purchased its common stock since the company was founded here in 1997.
Investors have lost billions of dollars in stock value as the price declined from more than $130 a share in March 2000 to less than $5 today because of uncertainty about the company's long-range performance.
Level 3, now based in Broomfield, Colo., built and operates an international communications network for high-speed and high-capacity voice and data transmission.
Some investment experts believe Level 3 will fail because there are too many companies offering similar communications services. Other investors and Level 3's top executives say the company will make it through the industry's current difficulties and become an important, profitable part of the communications industry.
Speculation about the bond purchase apparently has not affected the stock price, which has changed little in recent weeks. Friday, it closed at $4.44 a share, up 43 cents.
Reports on the bond purchase came in recent articles in two business magazines, Barron's and Business Week, which did not name the sources of their information. Investment regulations do not require companies to report bond purchases immediately.
Barron's said there's a rumor that Berkshire bought bonds with a face value totaling more than $1 billion, paying as little as 35 cents on the dollar. Mark Millard of Omaha, who is director of financial assets for Berkshire, led the bond-buying effort, Barron's said.
Business Week earlier reported that Buffett's bond trader at Berkshire's Omaha headquarters had purchased more than $600 million in Level 3 bonds. The magazine said some bond traders think Walter Scott Jr., Level 3's chairman and largest shareholder, may be buying Level 3 bonds through Buffett's trader.
Buffett does not comment on such reports, and Scott said Thursday he had no comment. Millard and a spokesman for Level 3 also would not comment.
Buffett has connections with Scott and Level 3. Scott is a director of Berkshire Hathaway and is chairman emeritus of Peter Kiewit Sons' Inc., which owns the office building at 36th and Farnam Streets in Omaha where Berkshire has its headquarters.
Buffett and Scott are involved in other business ventures, including MidAmerican Energy Holdings Co., a Des Moines-based electricity and natural gas utility.
Corporations can raise money by issuing bonds, essentially borrowing money from investors at a fixed percentage rate that depends on the amount of risk involved in the company and other factors. Investors who buy the bonds can either hold them to maturity, collecting the interest payments, or can sell the bonds before they mature.
If a company fails, bond holders have a claim against the company's assets. Common stock issued by companies, on the other hand, becomes worthless if a company goes bankrupt. Yet common stock can provide a greater profit for investors if a company prospers.
Because bonds can be traded, they have a market value that can vary according to the financial health of the company that issued the bonds. Thursday, Level 3's bonds were selling for $44.45 per $100 in face value, or about 44 cents on the dollar. The bonds are rated as risky, which means there are concerns about whether the company will make its debt interest payments on time.
George Morgan, a vice president with the Kirkpatrick Pettis brokerage in Omaha who studies Buffett's investment strategies, said Buffett could have negotiated a low price for the bonds if Berkshire was buying a large amount.
Level 3 has about $8 billion in long-term debt, much of it in corporate bonds, so a $1 billion purchase would give Berkshire a significant stake in Level 3's future.
Morgan said Level 3's bonds are selling at a discount because of the market's uncertainty over the company's future, the same factors that have driven its stock price down. "If you think a company is going to have trouble paying its bills, you're willing to sell the bonds at a discount," he said.
If Buffett is buying the bonds, Morgan said, it could mean that he believes Level 3 will become healthy and will make its bond payments on time, yielding a profit as the value of the bonds grows.
Morgan said Buffett also may believe that the bonds are a good investment even if the company fails because its physical assets - land, communications cables and other holdings - are worth enough to cover the value of the bonds. |
