With XO's refinancing complete, should we reevaluate the company's prospects now? Today the Icahn/R2/XO soap opera made it all the way to the New York Times, where Joe Nocera has a nice article on Icahn's relationship with the company and its investors. It is true that the possibility remains that R2/Amalgamated will succeed with pressure to change the deal, but I doubt if that will affect the companies business activities from here on out and it would only help their common shareholders anyway. Whatever we might think of the fairness of the refinancing, the time has come to look at the future of the company.
For years now, XO has seemed to be in asset preservation mode. They have acted to preserve their spectrum assets by investing just enough in NextLink's buildout to keep their licenses. They have been churning voice revenues in favor of data revenues just like everyone else, with almost non-existent growth until lately. They have been stuck at a bit over 3000 on-net buildings for years, apparently unwilling to spend capex to add more to their network and get more out of it. They have colo and hosting assets, but have not made a concerted effort to benefit from the surge in that sector. Other than the Allegiance Telecom purchase, XO has followed a very passive strategy, which one has to see as tied to the struggles over the NOLs and funding with Icahn.
But now, flush with $400M in cash, they seem ready to do more than defend. Even before the refinancing they had lit some of their fiber (18 strands on the Level 3 original plant) and begun selling wholesale wavelengths and other longhaul products. They have been rolling out an increasingly powerful base of ethernet services over the first half of 2008, and they are looking more and more aggressive. The new metro services to Charlotte may indicate that they are also beginning to use those metro fiber assets at last. XO really seems to be coming out of its shell.
So, should we let XO out of the doghouse? Should we expect more from the company now? Sustained revenue and EBITDA growth perhaps? Is this chapter of the Icahn saga over, now that he has access to the NOLs? The XO assets probably aren't sufficient to carry the company all that far, they have far less fiber than TW Telecom or Level 3. Thus I still feel the eventual destiny of XO lies in a merger of some sort. But the XO assets in their current form have been vastly underutilized, and they are undervalued compared to their potential in the hands of better management. Well, I suppose there's the rub, 'better management' is not so easy to attain even with better funding already in place.
I think the jury is still out, but the weather forecast for XO is certainly less forbidding than it has been. Perhaps the next step might be to do what it takes to list the company's stock on the Nasdaq again?
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