Competitive telecommunications provider XO Communications today announced it has made Laura Thomas its new Chief Financial Officer. This is an internal promotion, Ms. Thomas has been a VP of Finance for many years, stretching back into the pre-bankruptcy days. She replaces Gregory Freiberg, who left the company in April to take up the CFO role at Savvis. XO acted quickly and did not bother with much of a search for outside talent, but that isn’t really a big surprise. Given the current strategic environment, one has to wonder how long XO will remain independent and outside talent would probably require a rather golden parachute. Besides, being CFO at XO isn’t exactly a position with lots of room to maneuver, given Carl Icahn’s grip on its balance sheet. Ms. Thomas’s biggest task for this year is to ‘negotiate’ with Icahn for some sort of refinance for the company’s class A preferred stock that comes due next year.
But will they really get that far? Over the past few years, XO has lit its longhaul network, safeguarded its NextLink LMDS spectrum, rolled out Ethernet over copper, and churned off legacy revenue while growing the new stuff. Frankly, all things considered it has gone as well as they could have hoped, and they have even showed staying power through the economic crisis. However, for all those efforts and despite a solid tier-1 metro footprint, margins remain amongst the lowest in the sector. Their assets still look like a puzzle piece looking for a home, somewhere where the $1.4B pile of revenues might be worth more. They may now be at the relative peak of their potential for M&A.
I say that because they are a far, far easier target for an interested buyer right now than Qwest longhaul or Sprint wireline, even though those have gotten all the press lately. The cash on the balance sheet makes XO attractive, and the preferred stock in the hands of Icahn means that any buyer wouldn’t need much help from the credit markets. I’ve argued before that TW Telecom (NASDAQ:TWTC, news, filings) ought to do it but Level 3 Communications (NYSE:LVLT, news, filings) has always been a strong possibility as well, and both company’s stock prices have improved to levels that might make it usable for M&A. I suggested last week that Icahn and XO could use their leverage to facilitate others in a deal. But perhaps a more daring possibility would be for Sprint and Icahn to deal directly and set up an XO/S joint venture, since it is clearer to see Sprint keeping its control of the resulting entity. They’d be able to move all that revenue onto XO’s 18 strands of fiber on the LVLT network, and XO’s metro footprint wouldn’t hurt either. It would require little financial creativity to pull off, though the final company would be heavy on legacy revenues compared to other combinations.
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