Level 3 turns to loyal stockholders

By Jeff Smith, Rocky Mountain News (Contact)

Published December 24, 2008 at 12:05 a.m.

Text size

More Tech & Telecom

Level 3 Communications, with customer orders slowing, again is turning to loyal investors to try to keep afloat amid the recession.

The company averted bankruptcy during the telecom bust earlier this decade, in part by raising money from private investors like Warren Buffett.

Since then, the Broomfield-based communications carrier's revenues have grown through acquisitions and demand for high- speed Internet services.

But the company remains unprofitable, mired in more than $6 billion in debt, and shares have fallen to less than 70 cents. Ordinarily, Level 3 stock would be delisted, but Nasdaq has suspended the $1 minimum requirement until April 9 because of the country's economic turmoil.

There's no Warren Buffett as savior this time, but Level 3 recently raised $400 million from some of its biggest stockholders such as Southeastern Asset Management.

The deal, however, was contingent on Level 3 successfully buying back a certain amount of its 2010 debt at 62 cents to 70 cents on the dollar.

On Tuesday, Level 3 just barely managed to complete the minimum requirements - after extending the deadlines twice. A third offer to buy back 2009 debt has been extended another week.

With the $400 million of new capital and the company's own cash, "Level 3 remains confident it can address its 2009 and 2010 debt maturities," company spokeswoman Debra Havins said.

The new money isn't cheap. Level 3 will pay 15 percent annual interest on the $400 million of new capital, while the debt being retired was in the form of convertible notes at interest rates of 6 percent and 2.875 percent.

But Donna Jaegers, a telecommunications analyst at D.A. Davidson & Co. in Denver, has said Level 3 has little choice and characterized the deal as a key to giving the company "more of a runway" and to eliminate the risk of a near-term bankruptcy.

Level 3 also is seeking to shave costs, announcing recently that it was cutting 450 employees in North America, or 8 percent of its work force of 5,600. The largest number are in Colorado.

A number of analysts remain largely pessimistic.

The Stanford Group initiated coverage of Level 3 last week, setting a target price of only 30 cents per share. While noting some positives about the debt buyback and capital-infusion plan, it also said shareholders face a risk of having their equity wiped out or diluted further.

"Longer term there's certainly a bankruptcy risk," Jaegers said, if markets stay shut down.

Jaegers has followed Level 3 closely over the years, but doesn't have a current recommendation on the stock. Nor does she own any stock.

Level 3, which spent billions of dollars building a nationwide fiber-optic network, has lost money in every quarter but one during its 10-year history as a public company, including $120 million in its third quarter.

But CEO Jim Crowe has long resisted bankruptcy. During the third-quarter conference call, he said Level 3 experienced even tougher challenges during the dot-com bust in 2001 and 2002.

"It's pretty clear we're in a better position (today)," Crowe said.

Revenues have grown, totaling $1.07 billion in the third quarter. The company is about cash-flow break-even. But revenue growth is stalling.

Level 3's hope: The economy turns around in time for future debts to be resolved.

smithje@RockyMountainNews.com, or 303-954-5155

Subscribe to the Rocky Mountain News