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Buffett, Others Buy Stake in Level 3

Telecom: Billionaire investor and his partners will pump $500 million into the fiber-optic network operator.

July 09, 2002|From Bloomberg News and Times Staff Reports

Billionaire Warren Buffett on Monday agreed to buy a stake in a beaten-down telecommunications company.

But investors who were hoping the news might spark a broad rally in the depressed telecom sector were disappointed.

Buffett, who traditionally has balked at investing in technology businesses, agreed with two partners to pump $500 million into fiber-optic network operator Level 3 Communications Inc.

Buffett's holding company, Berkshire Hathaway Inc., along with investment firms Longleaf Partners Funds and Legg Mason Inc., will invest the cash in return for a 10-year convertible bond yielding 9% annually.

Broomfield, Colo.-based Level 3, whose fiber-optic lines carry voice and data transmissions, said it may use the capital to buy rivals.

The company's shares soared $1.47, or 51%, to $4.36 on Nasdaq, and traded as high as $5.34. But the stock is a shadow of its former self: It had reached $130 in the tech-stock heyday of March 2000.

The report's effect on other telecom stocks was muted at best.

Qwest Communications gained 28 cents to $2.10 and Sprint FON added 17 cents to $11.47, while Nextel Communications fell 19 cents to $2.91 and Broadwing lost 22 cents to $2.99.

Level 3 and companies such as Global Crossing Ltd., which is operating under bankruptcy protection, spent billions building networks in anticipation of a surge in demand for phone and data traffic that never materialized.

Buffett said in a statement that he thinks Level 3 can capitalize on its rivals' difficulties. "Liquid resources and strong financial backing are scarce and valuable assets in today's telecommunication world," he said. "Level 3 has both."

"It looks like Buffett thinks Level 3 may be one of the survivors and might mop up some of the other casualties," said Michael Micko, a bond analyst at Newton Investment Management in London.

There also is a personal connection between Buffett and Level 3: The telecom firm's chairman, Walter Scott Jr., is a director of Berkshire Hathaway.

Buffett, who says he prefers simple businesses, shunned tech shares in the 1990s, investing instead in firms such as Dairy Queen and paint maker Benjamin Moore.

Asked at Berkshire Hathaway's 1998 annual meeting why he avoids tech stocks, Omaha-based Buffett said: "I don't know what that world will look like in 10 years and don't want to play in a game where the other guy has an advantage over me."

The Level 3 deal is classic Buffett in one sense, analysts said: He's demanding a high-income return (the 9% yield) rather than simply taking a chance on price appreciation for his investment.

The bonds are convertible into Level 3 stock, at the investors' option, at a price of $3.41 a share. If eventually converted into shares, the bonds would give the investors a 27% stake in Level 3.

Longleaf invested $300 million in Level 3, while Berkshire Hathaway and Legg Mason each bought $100 million of the bonds.

Level 3 lost $90 million in the first quarter on sales of $386 million.

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