Mar 04, 1998
FOOL PLATE SPECIAL
An Investment Opinion by Dale Wettlaufer
Level 3 Leaps
Things are cooking at Kiewit Plaza in Omaha, Nebraska. Not only is the more famous tenant of the plaza, Berkshire Hathaway (NYSE:BRKa - news) and BRK.B), set to release its annual letter to shareholders sometime in the next week, but the class D shares of Peter Kiewit Sons (OTC:KIWT) have advanced more than 50% in the last month. The shares represent ownership of a Kiewit subsidiary, Kiewit Diversified Group. That company has now changed its name to Level 3 Communications, where the main story is that it's building out a 20,000 route mile national fiberoptic network. In view of the valuation accorded companies such as Qwest Communications (Nasdaq:QWST - news) , which is building fiberoptic networks and selling extra capacity to lower the net cost of that buildout (a strategy that Level 3 will follow), IXC Communications (Nasdaq:IIXC - news) , and other fiberoptic network builders, investors have been busy pricing the class D shares of Kiewit.
The heritage of Level 3 is rich. Peter Kiewit Sons built MFS Communications, which acquired Internet service provider (ISP) UUNet. MFS was then acquired by WorldCom (Nasdaq:WCOM - news) , which is now set to merge with another telecom pioneer, MCI Communications (Nasdaq:MCIC - news) . Level 3 Communications is not only building an Internet protocol-optimized fiberoptic network, but it also has a 48.5% interest in cable TV operator Cable Michigan (Nasdaq:CABL) , Pennsylvania telecom company Commonwealth Telephone Enterprises (Nasdaq:CTCO - news) , and Internet access, cable TV, and local and long-distance telecommunications service provider RCN Corp. (Nasdaq:RCNC - news) . RCN agreed in late January to acquire Internet service provider Erols, one of the nation's largest ISPs. Level 3's stakes in these three companies is worth, together, over $1 billion. The company also recently sold its 30% interest in utility CalEnergy Co. (NYSE:CE - news) for $1.2 billion, pre-tax.
With the run-up of Level 3 shares, the company's equity capitalization stands at $8 billion. Netting out the publicly traded holdings mentioned above and about $850 million in net proceeds from the CalEnergy sale minus $377 million in long-term debt, the enterprise value stands at approximately $6.4 billion. That's in the same neighborhood as Qwest, but Level 3's network will be about 20% larger. In addition, Level 3's management includes people who have proven track records of building value for shareholders in this specific business. Right now, the company's filings are a bit of a mess, as this isn't an IPO but a spin-off that doesn't necessitate a full registration statement. Just to let investors know -- this company is out there and will probably be a landmark on the growth stock landscape for some time. |
