Last summer, if you recall, XO Holdings (news, filings) refinanced its debt by selling preferred shares to its majority owner, Carl Icahn. A minority shareholder, R2 Investments, challenged the deal, and the argument and evidence behind that case are just now coming to light in court documents. The accusations against Icahn and the board of directors which he controls are really quite amazing, considering Icahn’s public image as a crusader for shareholder’s rights and accountability for directors. But I’m not a lawyer and what I’ve seen so far is just one side, so I’m not going to judge the whole case right now. But there is one item of great interest to me, found in Exhibit A. Here it is, verbatim (emphasis added by me):
10. Another alternative available to the Company was the sale of all or part of the Company. The Company’s financial advisor endorsed an active exploration of this alternative. Despite this recommendation, the Special Committee made no effort to solicit interest from potential acquirers. Nevertheless, at least four bidders expressed serious – and unsolicited – interest in acquiring all or part of the Company at prices that represented a substantial premium above the market price of XO shares. One potential acquirer, Bidder 1, made an offer of $1.0 billion for the entire Company. The Special Committee rejected this offer out of hand.
11. Another potential acquirer, Bidder 2, approached the Special Committee on June 6, 2008 with an offer of $900 million to $1 billion for the Company’s Wireline Assets. After an expedited due diligence process, on June 23, 2008, Bidder 2 made a revised offer of $940 million for the Wireline Business. Bidder 2’s proposal would pay shareholders approximately three times the Company’s current stock price while allowing the Company to keep the rest of its assets, including its billions of dollars in NOLs. In addition, Bidder 2 was prepared to sign transaction documents quickly. The financial advisor to the Special Committee, Cowen & Company (“Cowen”), made clear that the Special Committee should give Bidder 2’s offer very serious consideration. This proposed sale, however, would block Icahn’s effort to obtain further control of XO and thereby obtain the Company’s NOLs.
12. The very next day, June 24, 2008, at a meeting of the full XO Board convened at the offices of Icahn Associates, Icahn and the conflicted board rejected Bidder 2’s offer. The Special Committee expressed concern about its fiduciary duties, noting that it was required to consider the sale option. Icahn rejected those concerns. He recommended that the full Board vote to put “on hold” the pursuit of any alternatives to Icahn’s proposed transaction until the preferred stock deal was completed. The Board acceded to Icahn’s request. In short, when faced with the reality of an attractive sale alternative that would maximize shareholder value, the Icahn-dominated full Board simply limited the Special Committee’s mandate, precluding it from pursuing a potential sale and limiting the Special Committee to negotiating the transaction with Icahn.
Much was made of XO’s lack of options last summer, but it turned out they had at least two real offers, both of which were more than 3 times the stock price at the time. Icahn refused to sell, and instead used (or abused) his majority position to deal himself a better hand. This is a shareholder advocate? With friends like these, who needs malaria? I can’t wait to see the defense’s argument, so more on this to come I think…
The effects of this information on the success or failure of Icahn’s bid of $0.55 for the part of XO he doesn’t already own should be interesting to watch. But one thing is certain, those organizing against him are now even more pissed off than they were before. And they have more ammunition now as well.
So who was ‘Bidder 2’? Later in the document, we have this quote: “Bidder 2 had a demonstrated track record of rapid negotiations and acquisitions, having acquired seven entities in the prior eighteen months.” The only remotely likely bidder at the time that had this qualification was Level 3 Communications (NYSE:LVLT, news, filings), unless anyone else can think of another? Zayo acquired that many by then but didn’t have cash resources on the scale of $1B handy so they aren’t likely, though I’m sure Caruso would love to get his hands on that much fiber and his backers do have it so you never can tell. ‘Bidder 1’ could be one of several, but I would suggest TW Telecom (NASDAQ:TWTC, news, filings) as most likely.
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