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Level 3 Hits New Low

The telco now wants to do an IPO of its thinly profitable but covenant-enabling software arm.

Level 3's

(LVLT)

detour into the software business is ready to take another turn.

Always in the hunt for new ways to stay ahead of creditors, the struggling telco unveiled plans to raise as much as $115 million through an initial public offering of the thinly profitable software unit. The move comes some three years after

Level 3 expanded into software reselling from its core telecom-network operation as lenders came calling.

The company filed a registration statement late Friday to offer an undetermined number of shares of Technology Spectrum, its Plano, Texas-based software unit, to the public. The stock is expected to trade under the TSPE ticker on the

Nasdaq

later this year.

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Level 3, a Bloomfield, Colo.-based telco, has operated in red ink and under the weight of massive debts for years. The company emerged during the Internet building boom as one of the big national networks, but its shares have been hammered since investors

started demanding actual returns rather than mere promises. At the end of last year, the company had $5.18 billion in debt and $782 million in cash on its books.

Technology Spectrum is the combination of Corporate Software and Software Spectrum, two resellers Level 3 bought in 2002 to help lift top-line numbers and steer clear of a default with lenders.

Revenue from software resales accounted for more than half of the company's total sales in 2004. Last year Level 3 posted sales of $3.7 billion, of which $1.93 billion came from the software business.

But while the software-resale operation boosted sales, the business has been barely profitable. Net income for the unit last year was $9.5 million on sales of $1.9 billion. That compares to a 2003 loss of $35.8 million on $2 billion in sales.

Downer
Level 3 at lows

Level 3 will be keeping the proceeds of any IPO, but it isn't abandoning the software business. The company is expected to hold onto a majority stake in Technology Spectrum so it can continue to book the unit's revenue in its consolidated financial reports.

By coincidence, last week Level 3 substituted its telecom business as collateral for a $730 million loan from Merrill Lynch. Previously, the company's software unit was the business asset Merrill Lynch had secured as collateral. It is also a coincidence that Merrill Lynch is listed as the sole underwriter of the Technology Spectrum IPO, says a Level 3 representative.

The troubled telco's shares fell 5 cents to $1.57 Monday, hitting an all-time low.