Legg joins Buffett, Longleaf for deal

Investors put $500 million into fiber-optics company to help with acquisitions

July 09, 2002|By William Patalon III | William Patalon III,SUN STAFF

Legg Mason Inc. has joined hands with legendary investor Warren Buffett and another firm to invest a total of $500 million in Level 3 Communications Inc., a Broomfield, Colo.- based company that operates a huge fiber-optic telecommunications network, Level 3 announced yesterday.

The money will allow the well-capitalized Level 3 to prowl for bargain assets within the distressed telecommunications sector.

In return for the $500 million, Legg Mason, Buffett's Berkshire Hathaway Inc. holding company and Longleaf Partners Funds will each receive a convertible bond, a security that can later be swapped for Level 3 stock under certain conditions. Legg and Berkshire are investing $100 million each, and Longleaf is investing the rest.

William Miller, chief executive of Legg Mason Funds Management Inc., spearheaded the investment for Legg Mason. He declined to be interviewed.

In a statement, Miller said that "spending on communications services is nondiscretionary. We believe more strongly than ever that Level 3 is emerging as one of the ultimate leaders, survivors and consolidators in the industry."

Buffett has until now shunned technology, telecommunications and Internet-related investments in favor of businesses with simple-to-understand products, such as soda, candy and furniture, or investments in sectors such as insurance or newspapers, in which overnight obsolescence isn't a worry.

Buffett is also known for making investments during uncertain periods, or in companies or sectors shunned by the investing masses. With the bursting of the telecommunications bubble, investors have been selling off shares of companies in the sector.

Level 3 shares rose $1.47, or 51 percent, on yesterday's announcement, to close at $4.36. That's 97 percent below the stock's all-time high of a little more than $130 on March 10, 2000, the day the Nasdaq composite index reached its record peak.

"Any time the Buffett name or Berkshire Hathaway gets involved, stock trades up a bit," said Rick Grubbs, senior telecom analyst at Credit Lyonnais. "The bottom line is, this doesn't change the business. It remains to be seen what they do with money."

Buffett noted that "liquid resources and strong financial backing are scarce and valuable assets in today's telecommunications world. Level 3 has both. Coupled with the management of [Chairman] Walter Scott and [chief executive] Jim Crowe, in whom I have great confidence, Level 3 is well-equipped to seize important opportunities that are likely to develop in the communications industry."

Crowe said the money would most likely be used for acquisitions.

"We believe the consolidation opportunity in our industry, that is the opportunity to acquire customer bases that we can move to our network platform, is at an extremely high level, maybe a historically high level," Crowe told investors in a conference call.

Level 3 built and operates a 20,000-mile fiber optic network with global reach and has a customer list that includes the regional Bell operating companies, cable-television companies and Internet service providers.

With companies such as Flag Telecom Holdings Ltd., Global Crossing Ltd., 360networks Inc. and Williams Communications Group Inc. having filed for bankruptcy protection, analysts expect plenty of telecommunications assets to be on the market at prices far lower than the amount it would take to create them new.

The Associated Press contributed to this article.

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