XO Holdings: The Most Undervalued Telecom Stock?

Jun.12.07 | About: XO Holdings, (XOHO)

XO Holdings (OTC:XOHO) is a leading facilities-based, competitive telecommunications services provider that delivers a comprehensive array of telecommunications solutions to growing businesses, large enterprises, government customers, emerging and established telecommunications carriers and other communications service providers. With XO’s financial key statistics, it seems to be a no-brainer – $1.4 billion revenue but a mere $828 million market cap with a moderate net debts level. Although XO still loses money, the $100 million positive EBITDA will push XO into cash flow positive before long. All these compare XO favorably to its competitors and peer competitive telecommunication service providers, including Cogent (NASDAQ:CCOI), Savvis (NASDAQ:SVVS), Time Warner Telecommunications (NASDAQ:TWTC), Level 3 (NASDAQ:LVLT), etc.

XO provides both wireline (XO Communications) and wireless (NextLink) telecommunication services. Despite its no-growth legacy voice business, the data, Internet, and VoIP, plus its LMDS broadband fixed wireless business are catching up. XO Communications’ network footprint includes over one million fiber miles and 3,000+ on-network buildings. Its national network includes over 950 central office co-locations and media gateways to serve over 75 major metropolitan markets connected by a new Infinera-equipped 18,000 mile next generation nationwide Inter-City fiber optics network across the United States. To reach the Business Services market, XOC employs a direct sales and support organization. In addition, XO has agreements with over 500 third party national, regional and local agents and agency firms to represent a broad range of voice, data, consulting, and equipment services that they provide to end users.

XO also owns the largest LMDS spectrum portfolio in the United States with a carrying value of $35.8 million, which covers every metropolitan area with A, B, A1, A3, 39GHz B, E, G, F, N, D bands. In all the largest areas, such as NY, LA, Chicago and Atlanta, XO owns both A/B bands. XO/NextLink currently operates in 14 markets: Washington DC, Boston, Atlanta, Tampa, Miami, Nashville, Chicago, Kansas City, Dallas/Ft. Worth, Huston, LA, Seattle, Phoenix, Las Vegas – already more than its LMDS competitor FiberTower’s (NASDAQ:FTWR) 12 markets, and is expanding at the speed about 1-2 area each month.

Then why is XO’s stock traded like options for a regular stock?

Perhaps, this is largely because of the uncertainty caused by the proposed sale of XO, Inc’s wireline business in 2005 and the following legal fights and final agreement to mutually terminate the then contemplated sale between the minority shareholders and Elk Associates LLC owned by Carl Icahn - the chairman of XO’s Board of Directors. The Company then sought, received and considered offers for the purchase of all or part of its wireline business, but credible offers at a premium did not materialize before refocusing on its core business. Finally, the voluntary delisting of XO’s Class A common stock from the NASDAQ Stock Market and trading on the OTC Bulletin Board hid XO from Wall Street analysts'/investors' radar.

Carl Icahn – one of the shrewdest investors in the world and the Company’s chairman - currently owns 58.5% of XO common stock and 90+% of its debts. It seemingly remains to be seen whether Icahn is an asset to the Company – it all depends on how the minority shareholders’ interests are treated and lined-up.

However, the Company has determined to refocus on its core businesses to maximize shareholders’ value, including the possibility of renegotiating or refinancing its existing credit facility; seeking to consummate one or more strategic acquisitions; and otherwise expanding its core businesses. The Company also believes that in order to enhance its core business, it will need to make capital expenditures. Therefore, it may seek to raise capital through one or more offerings of debt and/or equity securities. There have been very encouraging signs in the short few months since XO made the realignment of business operations in late 2006, notably:

  • The substantial growth of nationwide high-performance enterprise Ethernet, MPLS-VPN, and VoIP services
  • The completion of high-speed backbone and nationwide Inter-City fiber optics network
  • The successful launch in 14 metropolitan markets and continuing expansion of Nextlink LMDS fixed-wireless services
  • The recent wins of agreements/contracts with China Netcom (NYSEARCA:CN), NTT America (NYSE:DCM), and PCCW Global business (OTCPK:PCCWY)
  • Short term, any revenue growth and loss reduction, and the XO common stock’s re-listing in the NASDAQ National Market, will boost XO’s share price. Long term, if Carl Icahn has its way in building XO into a strong competitive telecommunication kingdom, the stock could be multiple bagger.

    Finally, as of December 31, 2006, XO had net operating loss carry forwards of about $2.89 billion. That number shall not be buried in a potential acquisition deal.

    Disclosure: Author has a long position in XOHO.OB

    XOHO 1-yr chart