XO Communications: Open Letter to Carl Icahn from a Minority Shareholder

Dear Mr. Icahn,

I’m writing this letter to you as a concerned minority shareholder of XO Communications (XOHO.OB) and to let you know that you have a unique opportunity to a) prove you are a true shareholders' activist, b) make several billion dollars, and c) debunk rumors that you don’t know how to run a business.

How can you accomplish this?

1. First, remove the person managing the XO account and take control of the account yourself. I assume the person currently handling the account is not you because this person has driven the company into financial distress and destroyed shareholder value. While XO once traded at over $8 it’s currently trading at $.75. That’s right 75 cents. Surely a true shareholders activist such as yourself would never do such a thing. I also believe this person’s reckless actions have exposed XO to future legal action and uncertainty at a time when XO’s services are in great demand. As I’m sure you are aware these actions have already led to one shareholder lawsuit and the threat of more if XO continues on its current course.
2. Second, spend some time getting to know XO and its full potential as a going concern based on current market conditions. Note that XO’s core IP and data services are growing 30% annually and its total core services are growing 18.6% annually. XO’s total revenue has been relatively flat over the last two years but that’s because XO shifted its focus from legacy services to IP based services. Revenue should start to accelerate now as the percentage of legacy revenue decreases and core IP based revenue increases. Also note that XO is one of the largest holders of LMDS licenses. This spectrum has huge potential as both a substitute for the last mile as well as backhaul for cell sites. As wireless companies upgrade their networks to handle 3G and 4G traffic they will have to drastically increase backhaul capacity and Nextlink, a subsidiary of XO, is one of a hand full of companies with this type of spectrum.
3. Third, if you like XO’s prospects then extend the maturity date of the debt you own until July of 2012 and renegotiate the strike and maturity date of the preferred until January of 2013. And as a favor to me for bringing this matter to your attention, and because both of us own a boatload of warrants, I would personally appreciate it if you would renegotiate the expiration date of the warrants until January of 2013. All this could be accomplished with just a few phone calls and the stroke of a pen. Upon release of the news XO’s PPS would skyrocket and companies would be more incline to do business with a financially stable company.

What will all this accomplish?

1. It will prove you are a true shareholders' activist by renegotiating the terms of the debt and preferred instead of pursuing a rights offering that would likely cause massive dilution to minority shareholders that don’t have the resources to participate.
2. If XO’s 2008 EBITDA guidance is correct and the trend continues into 2009, then XO should become FCF+ in the second half of 2009. And as the legacy revenue rolls off and new higher margin IP based revenue increases margins will improve and EBITDA growth should accelerate. As XO’s financial outlook improves so will its PPS and since you, and/or your affiliates, own approximately 129 million shares of the common that alone could be worth 2 to 3 billion dollars. Plus a higher PPS could be used as currency to purchase other companies, preferably companies that use the same Infinera gear that XO has deployed, and make XO even more valuable.
3. Turning a bankrupt Telcom company into a highly successful CLEC with a state-of-the-art network should help debunk critics that claim you don’t know how to run a business.

Thank you in advance for taking the time to read my letter.

Sincerely,

Ed Johnson

Disclosure: Author holds a long position in XOHO.OB