Now that Carl Icahn has gotten what he wanted, access to the $2-3B in net operating losses, or NOLs, that XO has been sitting on, it is time to look at what happens next. Does Icahn intend to operate the business on into the future? I suspect not, his money has sat here longer than it usually sits anywhere, and he hasn't shown actual interest in telecom in quite some time.
I came across an interesting tidbit in XO's 2007 10-K. It turns out that Icahn already had access to the NOLs during 2003-2004, and he used them. Here is the quote:
For the period January, 2003 through January 2004, the Company was a member of an affiliated group of corporations which filed a consolidated return with Starfire Holding Corporation (“Starfire”), the parent entity of an affiliated group of corporations controlled by Mr. Carl Icahn. In January 2004, the Company deconsolidated from Starfire and under a Tax Allocation Agreement, Starfire will reimburse the Company each year going forward for the excess of the Company’s actual income taxes over the income taxes the Company would have owed if net operating losses or other tax attributes used in prior periods by the Starfire affiliated group were still available to the Company. The Company’s net operating loss carryforward has been reduced by the amount used by Starfire in 2003 and 2004. No amount has been recorded for potential reimbursement from Starfire under the Tax Allocation Agreement.
So in 2005, apparently in order to fund the Allegiance Telecom acquisition, Icahn actually gave up his access to the NOLs. It seems to me that at the time he intended to operate the business, that it was worth more that way since it would have scale. However, things didn't turn out so well and the resulting business hasn't lived up to the dream, so he has since been trying to get the NOLs back on his own terms. In late 2006 he tried to buy the wireline business (presumably with the NOLs), but was blocked and he gave that up in 2007. This year he succeeded with the latest refinancing deal, even though he must give back 30% of the tax savings he realizes.
What all this tells me is that he really has no more interest in operating the business, and we can expect him to now separate the NOLs and sell the rest. Well, perhaps not *now*, but it is the next step. It isn't that hard to do from a tax standpoint it seems. The assets are already in a lower tier than the NOLs (XO Communications versus XO Holdings), apparently in order to keep the NOLs usable the business holding the NOLs must continue in that business for two years in some form, which is easy to satisfy. XO can easily sell the wireline subsidiary and retain the NOLs, and since Icahn now has access to those NOLs he really has no reason to keep the wireline assets around and they are worth more in other hands.
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