XO Holdings: Raise Morale and Open Communications

The lack of liquidity and worries/uncertainty over XO's (XOHO.OB) finance and possible dilution with stock "right offer" have brought its stock down to all time low. However, based on the following facts and analysis:

1. XO is basically a healthy telecom company BUSINESS-WISE, and it is getting more and more healthy with its higher margin IP, data and Internet business growing 30-50% annually, offsetting its legacy voice business;
2. There are heated PR activities around XO business progress, executive interviews, conference keynote speeches, panel meetings, plus many full-page XO advertisements in major telecom trading journals;
3. XO owns the largest fixed wireless spectrum [LDMS] in the nation;
4. No executives have left the company for the past several years even though the stock option exercise price is still set at 5+?
5. The fact itself that Icahn is willing to swap up debts by equity (if he indeed wants to) shows the business is healthy since debts ownership only made sense to him when a company would go under;
6. In terms of stock performance, no evidence shows selling by "large" minority shareholders -- all acquired the stock at price of $4+;
7. Financially, XO doesn't need to borrow for almost another 12 months with its cash position of $183 million, and possibly additional $70 million in process, making it a total of $253 million;
8. Home owners with good credit are still getting home equity line at 4.9% today. No law says that a company can only borrow 3-4 times of its EBITDA run rate as some worried. Why can not XO – a company with $1430 million revenue and positive EBITDA -- refinance a total of $900 millions in the next several years – step by step without 400%-500% dilution as some people assume? Remember that Level 3 borrowed $7 billions, Global Crossing owes $1450 million and TWTC has $1380 million in debts. They could still survive, grow, or even be prosperous;
9. The economical situation and credit market may improve and become more business friendly during the next 12 months. XO's EBITDA may, actually will, improve significantly, too;
10. Carl Icahn might even be generous to extend his debts, or forced to do so since the Chairman and majority share/debts owner is squarely responsible for failing to refinance, deliberately or unintentionally, during the past 24 months;
11. Other investors, including current bondholders and shareholders may be willing to assume the debts secured by the not-so-shaky XO asset at 9-11% interest when the current 3-year CD generates only about 2.6-4%;
12. XO's low valuation with its rich asset, including the 20,000 miles backbone and Inter-City fiber with 1200 Gbps capacity, the multimillion miles of metro fiber and 200,000 enterprise/business customers, its largest fixed wireless (LMDS) spectrum in the nation, as well as the 4000+ management, engineers, and sales team is attractive to potential acquirers such as Qwest (Q), Sprint (S), Time Warner Telecome (TWTC), Global Crossing (GLBC), Level 3 (LVLT), or even Akamai (AKAM), Equinox (EQIX), Google (GOOG) – in a long shot. Started by Craig McCaw with $8 billion investment sunk in for the past 8 years, XO's $3.2 billion tax loss carryover credit is a strong incentive to profitable telecom companies to take over it for essentially free.

The odds are strong enough against the single pessimistic assumption -- Carl Icahn is a lawless and shameless theft, predator, and evil, who will steal the entire XO without paying a dime and leave no trace.

In fact, XO held a secret meeting with "known large minority shareholders" (under NDA of not trading the stock until March 2008) in last December to discuss the business and finance. So the Chairman is well aware that he has to get minority shareholders' approval for any motions involving self-dealing and/or conflict of interest; meanwhile, the Delaware Court On March 31, 2008 entered a Final Judgment order with 1) the reduction by 1.5% of the interest on the debt held by Carl Icahn 2) the waiver, through the due date of July 15, 2009 for any breach of the financial covenants with the Chairman 3) Award $8 million to R2's attorneys at Icahn's cost. This sends a strong and clear signal/warning that strengthens the FEC filing made by the minority shareholder R2 and the Fort Worth investment banker Geoffrey Raynor in Feb. 2008. That FEC filing strongly opposes the proposed stock "right offer".

XO's has to immediately raise its employees and management's morale and self-esteem in order to compete effectively in the tough environment. If he is serious about XO's business, Icahn should understand that without solid price and fully listing of the stock or without open communications, it is very difficult to win businesses and its customers' confidence. XO's investors have suffered what they do not deserve and they have suffered long enough. Some of them, including many Icahn-believers, have invested in XO for almost 5 years -- just watching their money disappear. However, as one of the most conservative Wall Street analysts said a year ago when XO was about 4.5 "XO is worth 30-50% more if only Carl Icahn is more shareholder friendly."

The current sentiment is as low as it could go. This might indicate the possibility of bottoming out. Yesterday, the FCC granted NextLink/XO LMDS license extension until 2012. That is an "important decision" and very encouraging news for XO to "expand our wireless networks to deliver mobile backhaul and alternative access solutions and offer services more broadly" in coming years. As Peter Lynch once said, if a company is not going into bankruptcy and its stock is trading for one buck, buy it.

Disclosure: Author has a long position in XOHO.OB

Comments

[JoeChristmas]

You've been writing about XO for some time. Under "Disclosure,"... you wrote "None." In the past (as recent as a few days ago), you wrote "Long." Does this mean, even though you seem confident XO is undervalued (and I tend to agree), you have sold your shares?

[tech101]

I have been long XOHO for more than a year, and I am still long. It should be my mistake if not Seekingalpha's.

Thank you for your correction and I apologyze for any possible misleading.

[tech101]

Another possibility for the error could be that more than one stock (XOHO) is covered in this article.

That could cause the confusion on SeekingAlpha's handling. At least, I thought I checked the box "long".

[JoeChristmas]

I thought it was a simple administrative error. Regarding XO, I have been following this company (and your reports here at SeekingAlpha) for some time. It really amazes me how far this has fallen. We sometimes partner with XO - they often host our solutions, bundling us with a few other vendors, taking a cut of the business and the traffic on their network. They are hungry for business and more flexible than many of their competitors. I don't think it's out of desperation. They are just quick to look for alternative revenue streams. It seems the market assumes they are going bankrupt. I can't explain it any other way. If Icahn came out today and made a few shareholder friendly comments, the stock would probably double.... Anyway, as of today I'm long XO....

[AmesTiedeman]

Slammed down 22% today. Are you sure your analysis is good?

[JonathanLiss, SAEditor]

Editor's Note: The initial disclosure reading 'none' was a mistake on our part, which was quickly picked up by our readers and has now been corrected. We apologize for that. Thanks for your diligence!

[Moonflye]

This is pretty interesting. But I wonder if you could tell us in very simple, plain language what protections minority shareholders really have in this case from Icahn letting the company file Ch 11 and coming out owning the company through his secured and unsecured debt positions? This really looks like a loan-to-own strategy.

[AmesTiedeman]

XO is no TWTC. XO is done.

[tech101]

Mr. Carl Icahn could try to force XO to bankruptcy by the financial covenants of the Credit Facility he owns for 10 times. But at the end of each quarter in the past two and half years, he waived his right and extended the Credit Facility.

Now the financial covenants were removed based on the Final Judgment and Order on April 4, 2008: “the waiver, through the due date of July 15, 2009, of any breach of the financial covenants in Section 6.6 of the Credit Facility, including the EBITDA (as defined in the Credit Facility) and unrestricted cash balance covenants. Waiver of the EBITDA and unrestricted cash balance covenants in the Credit Facility will eliminate concerns that the debt outstanding under the Credit Facility could be accelerated prior to its maturity as a result of non-compliance with such covenants.”

sec.gov/Archives/edgar...

Perhaps, we could also say that TWTC has not done yet.

[AmesTiedeman]

Buying XO here is like buying an expiring option. Do not risk real money here. This thing is junk.

[tech101]

It would be greatly appreciated if you point why, line by line if you could.

[User 180442]

Is there any Ichan-Motorola-XO angle to consider?

I seriously believe that Sprint and XO are talking about WiMax backhaul.