Amidst the R2/Icahn Turmoil, XO Shows Solid Growth

August 10th, 2009 by · Leave a Comment

Competitive longhaul and metro fiber operator XO Holdings (news, filings) filed their quarterly 10-Q today against the backdrop of Carl Icahn's bid for the common shares he doesn't already own and R2's attempt to slow him down in the courts.  Revenues of $385.6M were up 2% sequentially from $377.8 in the first quarter.  That's quite a strong number for XO at a time when many of its direct competitors are struggling to hold the line in a tough economy.  They did it by holding legacy and integrated services steady while growing their 'broadband' revenues.

They company hasn't issued a PR yet [EDIT: here it is] and doesn't calculate EBITDA in the 10-Q, but according to my back of the envelope calculations it appears to be $37.1M which would also be up sequentially from $28.1M in the first quarter.  That would put EBITDA margin for the quarter at 9.6% - an improvement certainly, but with a long way yet to go to catch up to its peers.  Nevertheless, it's a solid step in the right direction.  Can they keep it up?

Earlier in the quarter XO reabsorbed Nextlink into the rest of its operations, and as a followup they have written off some $8.3M of the value of their LMDS spectrum.  It's an admission of what had become obvious, that the earnings potential of the spectrum remains theoretical at best even after all these years.

One other possibly interesting item came after the close of the quarter.  On July 6, just three days before Icahn's bid of $0.55, XO repurchased 304,314 of its class A shares for some $18.4M from someone other than Carl Icahn.  First of all, this gives us a datapoint for what XO's class A shares might be worth on the open market, if there were such a thing:  a little over $60/share.  It also increases his percentage of the remaining class A preferreds to 83.8%.  If you recall last summers refinancing, there was a standstill provision preventing Icahn from doing anything that would bring him over the 90% threshold of total voting shares.  But by this action of XO itself, it looks to me as if this may be something of a moot point? Does Icahn now have a de facto 90% voting share?

Furthermore, does this affect the likelihood of success for Icahn's bid of $0.55?  Hmmmm...  I'm not sure of the implications, yet but I don't think it was a coincidence that they concluded this transaction on July 6 and Icahn then made his bid only three days later...  Any opinions out there?

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Categories: CLEC · Financials · Metro fiber

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