With Carl Icahn’s withdrawal of his bid [1] for the 10% of CLEC xoho 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 [2],
- 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 [3].
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?
10 Comments To "As XO Turns – Intermission"
#1 Comment By carlk On November 11, 2009 @ 10:21 am
“So, they won’t sell debt to outsiders to pay off the preferred A shares” vs. NOL’s is what you wanted to state.
Looking forward to a 3rd party, unrelated bidder who removes those NOL’s from Icahn, the Wolf’s bloody claws.
#2 Comment By Rob Powell On November 11, 2009 @ 11:46 am
Yes, I meant Class A there, I have fixed the text.
#3 Comment By en_ron_hubbard On November 11, 2009 @ 11:29 am
Rob,
A couple of points:
— As you say, the easiest route to refinance the Class A maturity is with senior secured debt, involving no dilution, Given the structure of the balance sheet (all preferred stock) this should be easy. Clearly Icahn doesn’t want to do this, so I smell another piece of litigation.
— We are currently protected from a short form merger by the terms of the standstill agreement. Icahn cannot convert the Class B and get to 90%+ except by a tender offer accepted by a majority of the minority, or a negotiated deal approved by the Board. WE just went through that and his offer was rejected (rightly). If he seeks to change that status quo through the terms of a new financing (series D?) then again I smell litigation.
— I agree with the prior comment– you meant Series A not NOL.
The issue with new senior debt is the existing litigation– no-one will want to invest prior to that being resolved. So where are we?…. buggered if I know. What I do know is that based on any reasonable comps this company is worth in the $1.80 range, but given the fact that we have a determined old goat calling the shots, seeing that resolution is a very questionable result.
#4 Comment By Rob Powell On November 11, 2009 @ 11:48 am
I would mention that the standstill agreement is an agreement between Icahn and Icahn’s board, I think they can dissolve it without asking anyone. Of course that would wind up in court too…
#5 Comment By en_ron_hubbard On November 11, 2009 @ 12:04 pm
Rob,
The shareholders are clearly (in legalese) “a third party beneficiary” of that agreement and would have standing in any court to object to its dissolution. So yes, it would wind up in court.
I forgot to add to my prior post that I thought your views on the situation as a whole were largely spot on. Please keep this sort of valuable editorial going.
#6 Comment By carlk On November 11, 2009 @ 2:47 pm
Yes Robert. You’re damn good regardless of what time zone you might be working from! 🙂
#7 Comment By Homer On November 12, 2009 @ 10:39 am
Icahn is in a much more precarious position than you think.
The basics: he really only owns a bit over 50% of the common. The preferred A will go away soon and with those a large chunk of Icahn’s voting power. On top of that a judge could potentially undo the pref B deal and with that all the voting power from that. Playing hardball on the refinance (i.e. bankrupting the company) would be the last thing Icahn would want. A bankruptcy judge could easily remove him and his board from the company and, much worse, he could risk a claim of equitable subordination.
I only see one option: Icahn must buy the rest of the company before the pref A mature. The soap opera we are watching is nothing more than posturing. He wants it cheap.
#8 Comment By none On November 12, 2009 @ 9:48 pm
penny flippers who bought this looking for a quick dollar or two may be waiting along time.. i do not think icahn will come back in with another offer.. he took to much flak from the press. he found away out by only offering .80 cents and cancelling it in three days. by saying he made a 100 percent offer. getting himself off the hook as well as the independent directors.. time to move on…..
#9 Comment By None On November 16, 2009 @ 9:42 am
Homer,
I agree with your analysis: what do you figure it’s worth?
#10 Comment By Homer On November 16, 2009 @ 10:41 pm
Should be worth at least $1.50-$2.00. Still a bargain for Icahn… but at that price I think most minority investors will be ready to throw in the towel.
Enron has posted some informative comps on the IV board.