With Carl Icahn's withdrawal of his bid for the 10% of CLEC XO Holdings (news, filings) he doesn't already own, the company and its shareholders have entered into a new stage, but one that is clearly temporary and somewhat contradictory. I frankly didn't think we would wind up in this position, but when it comes to letting his opponents twist in the wind Carl Icahn is an international grandmaster. I see his plan more clearly now in hindsight. Consider the following factors together:
- The company's class A preferred stock comes due on April 15, just 5 months from now.
- Carl Icahn owns 83.8% of the Class A preferred stock, and has indicated he will not extend that date further than he already has. Nobody can make him do so.
- Management is signaling they will not issue straight debt for reasons iterated in the earnings PR, even though this is probably the easiest route.
- Because the Class A has a liquidation preference above $4 per common share, any refinance will result in a lower strike price and hence more shares. This threat of dilution will itself act to keep investors from coming in and driving up the common now. Raising $250M at current prices would take several hundred million shares.
- If too many such shares (in the form of common, preferred, or converts) are issued to outside parties, Icahn's ownership would fall below 80% and he would lose access to the NOLs - which he will surely not let happen.
- If too many shares are issued to Icahn, then his ownership goes over 90% and he can force a short form merger.
- This means that any refinance that maintains the status quo would need to fall in a narrow range of Icahn/non-Icahn ratios, one that probably couldn't be guaranteed in advance.
So, they won't sell debt to outsiders to pay off the Class A, and they probably can't issue much stock to outsiders either. Even to maintain the status quo, they would need to find a third party willing to stick its hand into the proverbial blender. There are only three paths out of this mess that I can find:
- The last 10% of common shareholders cry uncle and sell out to Icahn,
- The company issues a pile of new preferred (class D?) mostly to Icahn after which he forces a short form merger,
- Icahn turns into Mr. Rogers and kindly extends the class A preferred shares without increasing his ownership levels.
- A judge tells Icahn to share his toys.
Anybody got any others? I suppose option 5) would be that an outside buyer could come in and make it all go away, but I've been waiting for that to happen for 4 years now and I'm not currently holding my breath. Since 3) is about as likely as it is Obama will formally declare war on Canada next week, common shareholders seem even more dependent on the R2 lawsuit.
A wildcard, as mentioned by the company in the PR, is the possibility of M&A of other CLEC assets by XO itself. Well, it would be one heck of a wildcard, because I can't figure out how to fit the funding of any substantial M&A into the above Gordian knot and I can't imagine many M&A targets wanting to step into the maelstrom right now.
But for now, nothing seems likely to happen until the New Year. Intermission, or maybe the eye of the hurricane?