Business Transaction: Level 3 Communications, Inc.
Level 3 Communications, Inc.
1000 Kiewit Plaza
Omaha, Nebraska
Dynamic change is sweeping through the once staid telecommunications industry and a new name in the industry, Level 3 Communications, is going to invest billions to buy a role in the industry's future. Level 3 Communications was formerly known as Kiewit Diversified Group (a diversified conglomerate which was part of Peter Kiewit Sons', Inc.-the privately-held, Omaha-based construction services and coal mining company). On March 31, 1998, Level 3 split off from Peter Kiewit Sons' through a share exchange which left Level 3 with approximately $3 billion in equity (after adjusting assets and liabilities to estimated market values). Level 3's assets consist of: ownership interests in three coal mines; stock in cable television, local and long distance telephone service companies; cash; PKSIS (a computer and information services subsidiary); and several smaller businesses.
On April 1, 1998, Level 3's stock started trading on NASDAQ under the LVLT symbol. Prior to being listed on NASDAQ, an informal market had developed for the stock on the OTC Bulletin Board beginning in November 1997. When Level 3's stock (which was known as Kiewit D until April 1, 1998) first traded on the OTC Bulletin Board in mid-November 1997, the price per share was approximately $20.00, or 1.72 times the book value per share of $11.60 (all figures adjusted for a 5:1 stock split on December 26, 1997). The market for the shares was thin in the early weeks but trading volume accelerated rapidly and by the time the company became listed on NASDAQ the price per share had soared to $70.00. Since the initial NASDAQ listing on April 1, 1998, the price has been as high as $83.75 per share, but dropped to $51.25 on May 15, 1998, giving the company a market capitalization of $7,530,000,000. Level 3's revenue for the quarter which ended March 31, 1998 was $87,000,000, which, if annualized, equals annual revenue of $348,000,000. In other words, Level 3 is valued at 21.6 times annualized revenues. With coal mining accounting for 61% of Level 3's revenues, this company is either the most overpriced coal company in history or there are some other factors at work. These other factors are Level 3's leadership and their business plan for their entry into the telecommunications industry.
Level 3's management is led by a man with an impressive resume. James Crowe was appointed as CEO of Level 3 in August 1997 (when Level 3 was still known as Kiewit Diversified Group). Mr. Crowe was no stranger to Kiewit, having led the creation, construction and expansion of a new Kiewit subsidiary called MFS. MFS was formed in 1986 as a facilities-based (they actually laid fiber optic lines) telecommunications services provider to business and government customers worldwide. Kiewit contributed approximately $500 million in capital to MFS in its early years, an investment that paid off on December 31, 1996 when WorldCom, Inc. acquired MFS in a stock transaction valued in excess of $12 billion.
Investors who pay the current price for Level 3's stock are betting that Mr. Crowe can repeat his MFS performance with Level 3. Despite the fact that only 33% of its first quarter revenues came from communications and information services operations, Level 3 describes itself as: "A telecommunications and information services company that has announced its plans to build and operate advanced fiber networks across the United States using Internet technology. The company plans to build local networks in cities across the country and to interconnect these city networks with a national long distance network. Additionally, the company has announced its plans to expand internationally. The Level 3 network will be the first national telecommunications network to use Internet technology end-to-end."
In the process of transforming itself from a diversified holding company into a telecommunications and information services company, Level 3 sold its 30% interest in CalEnergy for $1.16 billion in cash on January 2, 1998. In addition, the company has: announced its plan to build a 500,000 square foot, $70 million headquarters in Denver, Colorado; signed an agreement with the Union Pacific to use the railroad's right of ways for laying fiber optic lines; sold $2 billion in 9 1/8% senior notes due in 2008; and acquired XCOM Technologies (a competitive local exchange carrier and communications software development company) in a stock for stock transaction valued at approximately $168 million on April 23, 1998. Level 3 estimates that its business plan will require capital expenditures of over $500 million in 1998 and approximately $2 billion in 1999.
Level 3 Communications is a rapidly changing enterprise which bears little resemblance to its predecessor, Kiewit Diversified Group. Comparisons of year-to-year financial data provide no insight into Level 3's performance trends, but if you have ever grown tired of waiting for an Internet screen to be completed or think your telephone bills are too high, you have an idea of the growth potential for the telecommunications services industry. The company is well-capitalized and has proven management working on its business plan. Whether these factors can justify a market capitalization of $7.5 billion based on estimated net equity of $3 billion, when they have hardly begun to set up their facilities, remains to be seen.
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