seems its TIME TO BUY at $2.59
Q: How did Level 3 bonds or any bond like that ever show up in your equity search strategy?
Mason Hawkins
Well I’m glad you asked the last one. We’ll do it first because we made about 7 to 1 on your money in Level 3’s bonds. We bought the 9 and an eighths of ‘08 at 30 cents on the dollar, sold them at par, bought them back at 60 cents, exchanged them I think for 10 and a halves of ‘09, and then sold those north of par by quite a bit. We went then down the capital structure from the senior debt to two different ownerships of convertible debt, and one of those, you know, we got it par and got out at 200. And then as the revenues and the operating cash flow numbers developed at Level 3, we became comfortable then as owners and we started buying the common stock. We think the third time’s going to be the charm. … As far as Level 3’s understandability, I want to talk a little bit about that. It’s like a pipeline. It’s a very, very fixed cost business when you dig up the streets of America and put 13, 14 billion dollars in the ground. The politicians aren’t going to let us do it again because we cut every gas line and electric line and phone line and made everybody miserable and all the politicians got all the phone calls, so we don’t think they’re going to, we’re going to see that again, so we have a supply constrained interstate and metropolitan loop infrastructure that we don’t think is going to be easily replicable. The capital cost today might be multiples of what they did in 1997, 8, and 9 when they put this in the ground. And, and so, we believe that we have a fixed cost system that is getting filled up, and just like a pipeline, when you get through say 50 percent occupancy or you use up 50 percent of the capacity, almost every dollar that comes in over that has got a very high contribution margin. In Level 3’s case, it’s 70 percent, and we’re approaching that magical period where we blow through the fixed cost of depreciation and interest and we get into that, that payoff period, and the problem that we alluded to was that they had more demand than they could fulfill. They call it by another term, but the bottom line is, they got orders that they were having difficulty getting hooked up in time, so they had to stop and wait for the provisioning to get the line run say from the metro ring out, out there on I-40 or whatever, over here to the JCC. It takes a while to run that fiber line, hook up all the computers, and get all the phones connected and the TVs and what-have-you. So their challenge was one of prosperity, and we are grateful for that finally. We waited three years for the pricing to firm in this world. We were getting 100 percent unit growth and 50 percent price declines until recently. Now we’re still getting the 100 percent unit growth, as everybody wants to get on line and do movies on demand and ship videos around on YouTube and whatnot, so that is burning up capacity, and in many, many segments of the country, we don’t have enough, which means we’re finally getting the pricing that we’ve wanted for the last few years, and we do believe that we now have the right management team in place and obviously, you know, we’ve made a big bet. We increased our stake quite substantially, as you indicated.
