NEW YORK (CNN/Money) - Billionaire investor Warren Buffett is backing expansion by a small telecom company by buying its bonds, a move that helped lift the money-losing firm's shares nearly 70 percent by midday Monday.

Buffett, working through his Berkshire Hathaway Inc. investment vehicle, is part of a group of investors who together bought $500 million of bonds from Level 3 Communications, a Broomfield, Colo.-based fiber-optic carrier.

Level 3 (LVLT: up $1.79 to $4.68, Research, Estimates) said it plans to use the money for acquisitions. Its shares rose $1.96 to $4.85 early Monday afternoon on Nasdaq. They were the most actively traded on the Nasdaq composite index, which was trading in the minus column.

Berkshire Hathaway's (BRK.B: Research, Estimates) B-class shares, its more actively traded equity, gained $49 to $2,305.

The cash infusion comes at an opportune moment for Level 3, which has been losing money since the first quarter of 1998. With many companies in the telecommunications industry -- most recently WorldCom -- unsettling investors with accounting scandals, over-capacity and disappointing demand, Level 3 now is looking to buy rivals' assets and snare their customers.

"It is widely recognized that the telecommunications industry is going through a period of unprecedented turmoil," Level 3 CEO James Q. Crowe said in a statement.

"At the same time, however, the ongoing shakeout is creating extraordinary opportunities, as telecommunications companies, their network assets and customer bases become available," Crowe added. "We are fortunate to have both network management expertise and financial dry powder, which will allow us to continue pursuing opportunities that create value for our stockholders."

The cash infusion is being made through a debt offering. Level 3 is selling $500 million of 10-year convertible notes yielding 9 percent to Berkshire Hathaway and two other institutions, Longleaf Partner Funds and Legg Mason Inc.

Longleaf agreed to buy $300 million of the notes, with Berkshire Hathaway and Legg Mason each taking on $100 million.

The notes are convertible into common stock at the option of the holder. The transaction is expected to close Monday.

The move is unusual for Buffett, one of the world's most influential investors, who has long had a reputation for avoiding technology-oriented investments. An admitted "lifelong technophobe," he repeatedly has said he would not invest in areas he did not understand or where he could not identify long-term winners.

In a statement, Buffet said Level 3, whose chairman, Walter Scott, also sits on Berkshire's board, meets his investment criteria.

"Liquid resources and strong financial backing are scarce and valuable assets in today's telecommunications world," Buffett said. "Level 3 has both."

Analysts' initial reaction to the bond deal was mixed.

"To the extent it [Level 3] can pick up customer lists with good credit-quality customers, that's a good thing, as long as there's not more debt coming with it." Credit Lyonnais Securities analyst Rick Grubbs said.

Grubbs warned that an acquisition of another telecommunications company would increase Level 3's already high debt level, which currently stands at roughly $6 billion. The best possible scenario would be for the investors to convert the notes into equity as soon as possible so Level 3 would not have to pay interest on the bonds, Grubbs said.

At the same time, Merrill Lynch's Adam Quinton reiterated a rare "sell" rating on Level 3 shares, warning his clients that the company will struggle to generate sufficient earnings by 2005 to cover its $800 million per-year in capital expenditures and interest expenses, and thus move to a cash-flow positive situation.

If the company does not become cash-flow positive by then, Quinton said, a financial reorganization is likely since its $6 billion of debt comes due between 2005 and 2010, which he said he does not expect the company to be able to satisfy through internally generated funds.

Quinton also raised valuation concerns, pointing out that Level 3 shares currently trade at a multiple of about 12.7, compared with a sector average of 5.1. "We continue to believe that Level 3's valuation looks unattractive relative to its peers," Quinton said.  

-- from staff and wire reports