Level 3 makes its pitch - but will Williams want to play catch?

By Paul Deckelman

New York, July 25 - Level 3 Communications Inc. apparently did not waste very much time after lining up $500 million of fresh capital earlier this month to pursue its goal of making acquisitions in the troubled telecommunications industry. Media reports said that the Broomfield, Colo.-based fiber optic telecom network operator has made a bid to buy bankrupt Williams Communications Group Inc. - but the latter company may not be interested.

Wednesday's editions of the Wall Street Journal reported that Level 3 - one of the few high yield telecom companies left still standing in the midst of a violent industry shakeout that has sent numerous competitors, including Williams, into bankruptcy - has offered to buy its fallen rival for about $1.1 billion, consisting of $1.08 billion cash and $50 million of Level 3 stock. The paper, citing information from people close to the situation, said that since the bid is conditioned upon Williams having at least $450 million of cash on its balance sheet, the effective cash cost to Level 3 would be $625 million.

Back on July 8, Level 3 had announced that a troika consisting of Berkshire Hathaway Inc. - the investment vehicle of legendary billionaire stock-picker Warren Buffett - Longleaf Partners Funds and Legg Mason Funds Management - had purchased $500 million of newly issued Level 3 9% convertible notes due 2012, with Longleaf kicking in $300 million, and Berkshire Hathaway and Legg Mason $100 million each. The investment group raised the possibility of injecting further cash into the company.

The investment was notable not only because it came at a time when most of the telecom industry was reeling from a lethal combination of slowing subscriber growth, too much capacity, falling prices, choking debt and accounting problems at some high profile names like WorldCom Inc. and Qwest Communications International Inc., but because Warren Buffett was involved.

Historically, the 73-year-old investment guru, dubbed the "Oracle of Omaha" for his savvy stock picks, had been notoriously reluctant to invest in telecom and other high-tech "go-go" credits during the boom of the late 90s, sticking instead to less glamorous low-tech segments like insurance and candy, ice cream and beverage makers. But he declared that, "liquid resources and strong financial backing are scarce financial resources in today's telecom world - and Level 3 has both."

The company's chief executive officer, James Q. Crowe, said at that time that he planned to make a sizable acquisition in the troubled industry. Level 3 had already bought McLeodUSA Inc.'s Internet-access assets for $55 million in December, before the Cedar Rapids, Iowa-based competitive local exchange carrier filed for reorganization, and Crowe said he hoped to do something like that on a larger scale, but he declined to say who his target might be.

There was some speculation that Level 3 might bid for Bermuda-based international telecom network operator Global Crossing Ltd., and it ultimately did submit a bid for some of its assets, believed to be Global Crossing's Frontier operations, which consist of the former Rochester Telephone Co. a provider of telecom services to corporations. Level 3's bid was one of only a handful of such bids submitted by different investors for all or part of Global Crossing, with the bids totaling far less than the latter's management had been hoping for. An auction was scheduled for Wednesday, but there was no immediate word on the outcome.

At the same time, Level 3 was seen setting its sights on Williams, a Tulsa, Okla.-based fiber optic long-distance network operator which sought protection from the holders of its approximately $2.5 billion of junk bonds and its other creditors on April 22. The Journal reported Wednesday that Crowe sent his company's offer to Williams Communications CEO Howard E. Jantzen on July 17.

Internet investment website TheDeal.com reported Thursday that Williams management had essentially rejected the Level 3 plan, causing the latter to leak it to the Journal in hopes of drumming up support. According to TheDeal.com, Williams bondholders expressed opposition to the Level 3 plan, which would pay off $775 million of bank debt and then leave the bondholders to split about $350 million, resulting in a likely return on their bonds of about 14 cents on the dollar - representing no improvement from the level where Williams junk bonds have recently been mired.

The bondholders were reported to instead prefer an alternate plan, apparently also favored by management, which would have New York-based financial services concern Leucadia National Corp. investing $150 million into Williams, which would mostly be used to cover short-term operating costs and pay down some bank debt. In exchange, Leucadia would receive a 45% stake in Williams Communications, with the bondholders slated to get the rest of the equity in exchange for wiping out their bond debt. The Leucadia plan also calls for the company's bank lenders to receive $250 million from the company and Leucadia once it emerges from bankruptcy, with $450 million of bank debt to remain on the books. Williams Communications' former corporate parent, Tulsa-based energy trader and pipeline operator The Williams Cos., would meanwhile receive $180 million, in exchange for withdrawing $2.4 billion in claims against the broadband provider.

Williams Communications intends to make the reorganization proposal official soon in a filing with the U.S. Bankruptcy Court for the Southern District of New York, TheDeal.com reported. Williams Communications has already agreed to an Aug. 13 hearing on the plan.

Williams confirmed that it had received a bid from Level 3, but disclosed no further information, while media reports said that executives at Level 3 and Leucadia declined to comment.

Level 3 Communications bonds - notably its benchmark 9 1/8% senior notes due 2008 - have recently been quoted in the upper 50s, while the Williams bonds continue to languish in the lower teens.

A junk bond trader opined that Level 3 probably did not have much of a shot at actually buying Williams - "maybe they were just trying to monkey around with Leucadia National," he suggested. And nor did he think that having Level 3 buy Williams would necessarily be the best thing for the battered telecom industry, which suffers from a glut of facilities, built at huge expense at a time when everybody thought the market for telecom services would just continue expanding, seemingly forever. If it were to acquire Williams, Level 3 would be getting that company's 25,000-mile fiber optic network, this on top of its own sizable fiber optic capacity.

"I'd love to see the [Williams] customers go over [to Level 3], the trader said. But all of that extra network - you can just shut it down."

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