Last week, Infinera cut its forecasts for the second half, blaming delayed buildouts by North American carriers. At the time, I suggested that it was likely cutbacks in spending by Level 3 and XO. This was an obvious statement of course, given that these two are perhaps the largest of Infinera's North American customers. However, subsequent events have pointed the finger primarily at XO. First, Infinera stated that variability from Level 3 was not a major factor. Second, Jefferies put out a report yesterday suggesting that after a briefing with management they feel that the pullback came from reductions in purchases by XO.
Now, under reasonable circumstances, an action by XO to conserve cash would be a no-brainer. They don't have much and just got a loan from their chairman and majority owner Icahn to reduce the crunch. But this has been true for years now, and it has never stopped them from spending before. In fact, their entire Infinera rollout was done with money they shouldn't have spent if they weren't a special case. But they *are* a special case, and therefore I ask the simple question: what has changed? Why stop the Infinera rollout now? The only thing that has changed, IMHO, is the increasingly public complaining coming from XO's minority shareholders.
I strongly suspect that a cutback in cash indicates that resolution of the Icahn/XO soap opera will come by Christmas. The pressure from minority shareholders means we will probably see XO formally put on the block again before it is over, but Icahn's price may still be too high. If so, we will have the pleasure of watching something like a rights offering, where Icahn will probably emerge with the means to claim those NOLs he wants so much.
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