What's Causing the Uncertainty Around XO Communications?

Oct.31.07 | About: XO Holdings, (XOHO)

XO Holding Corp (OTC:XOHO) is seemingly doing very well and firing on every cylinder:

  • The build-up and completion of the NexLink national LMDS fixed-wireless networks in 37 markets
  • The Inter-City optical backbone and the "10 Gigs in 10 Days" Guarantee with 1200 Gbps capacity across the nation
  • The numerous wins of an impressive list of enterprise customers: GameRail, Savvis, China Netcom (NYSEARCA:CN), NTT America (NYSE:DCM), and PCCW Global business (OTCPK:PCCWY).
  • Many prestigious technology and innovation awards ranging top Ethernet Providers, Telephony Innovation, two Best-in-Class Metro Wholesale
  • Both of revenue quality and EBTDA numbers are improving quarter over quarter while higher margin IP, data and video services revenue becomes a larger and larger portion than voice, now about 50% each.

Even though the recent M&A events in telecommunication services industry, including the purchase of McLeodOUSA by Paetec (NASDAQ:PAET) and Covad (DVW) by Platinum Equity, show three times or more value than XOHO is currently worth, the stock has crashed from the high of 5.45 half year ago to barely above 3 in the middle of August and has improved little ever since.

What on earth happened that makes the company change from one of the most undervalued telecommunication stocks to the underdog in such a short of period of time?

There are indeed some strange things around the stock that puzzles investors. XO Holding takes in about stable $1.4 billion annual revenue with little improvement or deterioration in recent years. Although the company still lost about 60 cents/share (ttm), it did record about $100 positive EBIDTA in the past twelve months and improving.

With $114 million cash in hand, what makes XO apart from a regular stock is that the famous corporate raider Carl Icahn, who is also the Chairman of the Board of Directors, owns 58.5% of XOHO.OB’s common stock and 90%+ of its debts – a moderate amount of $356 million, which has been owned and extended by him for the past 3-4 years.

However, the company has made no significant effort to refinance its debt even though the credit market was historically cheap during this period of time. This apparent conflict of interest, in addition to the deficiency of an independent Board of Directors, hold the stock de-listed from the NASDAQ and has kept the company with the “OB” tag attached to its stock symbol, which seriously hurts the company’s image and the stock price. The de-listed status also harms the company’s marketing efforts unnecessarily, to say the least.

Everyone has good words to say about Carl Icahn: investment-savvy, shareholder interest fighter, while cold-blood and ruthless, … except one word “stupid”. However, no one can grasp and explain why XO has failed to make refinance of its $356 million debts that Carl Icahn happens to own 90+% of it during the past 4 years when credits were almost free. There could have been one million reasons and excuses that any business would fail, but it is a mystery why this could happen and last for so many years in the post-Sarbanes-Oxley era.

Mr. Carl Icahn frequently makes news as a shareholder’s value fighter, but it is so ironically that the shareholders’ value gets ignored and trashed at his own back yard. Despite that there is growing evidence that the debt markets are coming back to life, so far there is no sign that indicates XO is doing anything to refinance its debt. Some minority shareholders start to worry if Carl Icahn himself has done enough for shareholders value (if not taking advantage of his position unfairly) and whether the BOD is fulfilling its fiducial responsibility. And a well-known telecommunication analyst also said if Icahn was just a little more shareholder friendly, the stock could move up 30-50% from the current levelon June 18 when the XOHO.OB was 4.5.

However, the most ironic and sad fact is that no one knows for sure whether Mr. Carl Icahn realizes that he himself is the very cause of the uncertainty around the stock.

Disclosure: Author has a long position in XOHO.OB