Is Level 3 Really Interested in Williams?

With a fresh infusion of $500 million burning a hole in its pocket (from an investor group led by Warren Buffett’s Berkshire
Hathaway), Level 3 Communications is looking to make some acquisitions, and its largest rival, the bankrupt
Williams Communications Group, has become a prime target.

Reports Wednesday uncovered that Level 3 Chief Executive James Crowe offered to acquire Williams for $1.1 billion in a July 17
letter sent to Williams CEO Howard Janzen.

Williams is in a difficult spot. Currently at the mercy of Chapter 11 bankruptcy proceedings, the company owes its banks about $725
million, its bondholders about $2.5 billion, and its former parent — struggling energy giant Williams Cos. — about $2.3 billion.

Level 3’s offer, which is contingent upon Williams showing at least $450 million on its balance sheet, would cover the money owed to
the banks, but would only deliver a fraction of what the ailing carriers’ carrier owes to its bondholders and Williams Cos. And yet
that creates a difficult hurdle for Level 3, due to an existing agreement which requires bondholders’ support for any reorganization

And while bondholders are sure to dislike a plan which only promises them pennies on the dollar, they may be tempted by an offer
from Leucadia National Corp. , a diversified holding company with interests as varied as banking, manufacturing,
winery operations, real estate, copper mining, insurance and reinsurance. Under that plan, Leucadia would invest $150 million into
the company, allowing it to emerge from bankruptcy court as a stand-alone company controlled by the bondholders themselves. The plan
would give bondholders 55 percent ownership of the firm. Leucadia is expected to file its plan with the bankruptcy court any day

There is little question that the acquisition could benefit Level 3, according to analysts. Both Level 3 and Williams are the last
of the big pure play wholesale telecommunications providers which sell transport to telecom firms. And Williams, which was the first
firm to enter that market, has a state-of-the-art network which is also the largest carrier’s carrier network in the ground today,
covering some 33,000 miles.

“They’re trying to take out their most significant rival,” Seth Libby, analyst with the Wholesale Communications Group of research
firm The Yankee Group, said of Level 3. “If Level 3 were successful in their bid to buy Williams, they would remove a significant
wholesale provider in the market and stabilize prices.”

He added, “It would be the biggest pure play in terms of revenue, in terms of network footprint, and, I would argue, in terms of
network quality.”

Lisa Pierce, analyst with Giga Information Group, agreed. “It makes sense,” she said. “The wholesale business is so cutthroat, the
margins are so slim. Competition has to be scaled back.”

With the acquisition of Williams, Level 3 would achieve three goals, Libby said.

First, it would eliminate its most significant competitor. There are other firms that compete on a national, regional and even local
level, but none of the other competitors at the national level are pure plays, Libby said. Most also compete with the ISPs,
competitive local exchange carriers (CLECs) and regional bell operating companies (RBOCs) which are their potential customers.

Secondly, Level 3 would capture Williams’ customers and revenue streams. Williams showed $1.2 billion in revenue over the course of
last year, Libby said. Level 3 is sure to be interested in the Williams carrier business, as well as Vyvx, Williams’ digital media
delivery business.

Thirdly, while the Williams network does duplicate parts of Level 3’s own network, the acquisition would still give Level 3
significant network assets that it can’t currently match, including certain metro markets and some long-haul assets. Additionally,
Libby said the firm could conceivably leverage two networks to open up more complicated deals involving services like mesh networks.

Still, while such an acquisition stands to benefit the firm, Level 3 would still have to go through Williams’ bondholders, which are
likely to fight the plan. Libby suggested that it is possible Level 3 had ulterior motives for making the offer for Williams.

“Level 3 is a very, very savvy company in the way it manages investors and industry relations, and the score that it made a couple
of weeks ago with the investment from Buffett is an important signal because it’s at least a turning point,” Libby said. “It is good
news. They have demonstrated an uncanny ability to outwit their pundits and stay one step ahead of the market.”

With that in mind, Libby suggested that Level 3 may have made the offer simply to keep its name out there. Or, a more tantalizing
possibility, the firm may be attempting to distract watchers from other acquisitions it is sizing up, like WorldCom assets.

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