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Level 3 Makes Play for Williams

Backbone provider assets are on the auction block, and it appears that Broomfield, Colo.-based Level 3 Communications is ready to ante up.

The fiber optic network carrier has offered $1.1 billion for Williams Communications Group, according to a Wall Street Journal report Wednesday. The company has already placed a bid on the Frontier operations of Global Crossing, the first of the backbone providers to fall.

With regulators and Congress probing the ailing industry, and the high profile collapses of both Global Crossing and WorldCom, the assets of backbone providers seem to have raised little interest. Global Crossing, whose asset auction closes Wednesday, has attracted few bidders. Meanwhile, Europe's KPNQwest began shutting down Ebone, its 10,000 kilometer European backbone network, in early July after failing to find a buyer.

But Level 3, with a fresh infusion of $500 million from a group of investors including Warren Buffett's Berkshire Hathaway, seems ready to snap up some competitors' assets on the cheap. The investor group, which announced its plans on July 8, hopes to spark a round of consolidation in the industry, which is suffering from years of murky accounting and a glut of capacity.

According to the Journal, Level 3 Chief Executive James Crowe made the offer for Williams in a July 17 letter to Williams CEO Howard Janzen. Meanwhile, Williams has been pursuing its own means of emerging from bankruptcy: a deal in which Leucadia National Corp. will invest $150 million, allowing Williams to leave bankruptcy court proceedings as a stand-alone company controlled by its bondholders. The Journal said the Leucadia deal could be filed with the bankruptcy court as early as Wednesday.

It is unclear how Level 3's bid could affect Leucadia's offer. Level 3 has reportedly made its offer contingent on Williams -- which owes about $725 million to its banks, about $2.5 billion to its bondholders, and about $2.3 billion to former parent Williams Cos. -- having at least $450 million on its balance sheet. Under Level 3's deal, the banks would be paid-off in full, but bondholders and Williams Cos. would only receive a fraction of what they're owed.

However that could be a huge sticking point for Level 3, due to an existing agreement for Williams' current bondholders to support any reorganization plan. Also, Level 3's offer would be subject to the bankruptcy court process, meaning competing bidders could swoop in.