XO Drops the Other Shoe, Announces Rights Offering

October 12th, 2010 by · 16 Comments

Ok, so it turns out that the $50M raised last week by XO Holdings (news, filings) was just the first volley of its attempt to raise cash at last.  Today the company announced that it intends to raise $200M via a rights offering.  Holders of the company's common stock will be able to purchase shares of what will be class D preferred stock.  The company intends to use the money to fund its expansion and transformation.  And they're doing it as promised, without raising any of that evil long term debt - at least not in name.  Unexercised rights will be allocated to other shareholders on a pro rata basis who have indicated their desire to oversubscribed.

Now, what does this mean?  At first blush it looks like a way for Icahn to further increase his ownership of the company, as it seems unlikely to me that minority shareholders who are currently quite angry with Icahn will now pony up their share of cash for these preferred shares, and hence Icahn will be buying more than his share if the company is to raise the full total.

However, I'm not quite sure what Icahn would get out of doing so.  He already has access to the NOLs, and I don't think this would give him the opportunity to pull off a short-form merger or anything like that. And why pump more than his share of $200M into the company this way if he could buy out the rest of the common shares for less?

So right now it's unclear to me what's up.  Perhaps he even intends *not* to buy his share of this offering.  The PR seems to say that there are no voting rights with these class D preferreds, and hence he might not actually care if others buy them since he'd still have his access to the NOLs.  In fact, the idea might simply be to raise straight debt without calling it by that name.  We'll have to see what sort of interest rate they slap on this thing.

Confusing.  Can anyone help clarify?

Categories: CLEC · Financials

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16 Comments So Far


  • en_ron_hubbard says:

    Wow, what an opportunity!
    <>

    So, the equity holders in XO will be offered the opportunity to acquire new debt– because that is what this is, debt. It is a straight PIK preferred with a rate and maturity to be determined. My guess is this will NOT be priced to trade at par and will not be subscribed to by the minority equity holders who won’t want a (completely?) illiquid piece of non cash paying debt.

    Next question– does this enhance Icahn’s control? Doesn’t appear to. Another question– why didn’t the release include the information that Icahn intends to take up his portion of the offering? Don’t know.

  • Homer says:

    Rob… you are right. This is all posturing ahead of the imminent new offer by Icahn.

    Today we have a hearing on motion 7 on the R2 vs Icahn suit. This motion asks for a dismissal of the case. Once that motion is decided we should have all the pieces necessary to value the minority interest.

    Again, this case will never tried, a settlement will come in well before that (that is, of course, unless Icahn can get the court to dismiss the case now). Once this motion is decided, a new offer should be coming very soon. The value of the offer will reflect whether the case was dismissed or not.

  • Anonymous says:

    Who would want this piece of crap security and why would they want to own it?

    It’s doesn’t pay a cash dividend/interest and it’s not convertible into common. It’s like owning a piece of shit that that pays a dividend in more shit. So in the end you have a big pile of shit.

    All of Wall St really needs to be out in jail.

  • Anon says:

    In a private co this is called a capital call. Existing shareholders get right to buy the issued rights (to buy shares). As opposed to an underwritten offering to new investors (perhaps a tough sell these days). Perhaps this is classic Icahn – use your wallet to get your way. Are the minority holders really going to invest more money in a deal that they are so sideways in that they are in lit ??

    Not checkmate yet,,,, but maybe this is Check and we are a move away from the End

    • Anon don't be surprised says:

      Anon, don’t be surprised after the dust settles with the 2 lawsuits, that the minority shareholders will be the ones who will be throwing down checkmate. The way the market is valuing XO right now it will be with their pond.

  • CI's At It Again says:

    XO is looking very insolvent to me if they cant raise the $200M. This smells like Icahn’s old game of taking a company in & out of BK to flush the minorities to achieve greater/complete control. I wouldn’t be surprised if that’s his game especially if he cant cut a deal with R2.

    • en_ron_hubbard says:

      CI– look up the definition of “insolvency”. XO isn’t close to there. Based on guidance– no, forget that, based on LTM #’s– they have senior debt capacity in the $300 million range.

      This proposed rights offering does NOTHING to enhance Icahn’s control and I would welcome him eating the whole issue (unlikely). Anyway, BK is not in any realistic future so recalibrate your thoughts.

    • tech101 says:

      You’re right only if the States is a literally lawless country.

  • BK???? says:

    BK are you kidding me? XO is no where near BK. Level 3 yes, that’s right around the corner.

  • anon says:

    XO is rumored to be the new sugar daddy for the One Communications buyout. Sounds like they need a cash infusion to pull it off.

    • XO+1Com says:

      Interesting rumor. Anything else you can add to that?

    • Rob Powell says:

      Doesn’t make sense to me. The rights issue won’t happen until January or later. If they were going to buy One, they’d do something a bit faster and more certain to work.

      And does it make sense right now for XO to buy a fiber-lite CLEC?

  • disgruntled_customer says:

    maybe with some of this cash they are trying to raise they will hire some support staff had a down circuit a week ago and it only took 9 hrs to get someone assigned to it and another 8 to get it resolved. as soon as our term is up we are gone….

  • mozoz says:

    Forgive me but I haven’t kept up to speed on XO for some time.
    Does the $50M financing not give XO enough headroom to get to a steady FCF state? If so, how can Icahn (i know, stupid start to a question on XO!) justify a further dilution of current shareholders for $200M that is not essential? That implies to me that he’ll have to announce the deal he is looking to use the $200M for prior to offering?

    Also, the Class A are convertible into approx 410 shares and counting @ 1.75% per quarter. The C perpetual, are just like not senior debt by another name at 2.375% per quarter (i.e company can buy back but not convertible into stock)?

    Tks for coments. Moz

    • Homer says:

      There is no dillution from the credit facility and no dillution from the new preferred D. Neither of them is convertible.

      The credit facility is comparable to anything you can get from a bank and the preferred D is essentially a zero coupon junior bond (the twist there is that any current shaholder can participate as a co-lender… just so that no one can argue Icahn got better terms from the company just for himself.. and sue him… again)

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