In the latest installment of the saga of XO Holdings (news, filings) and Carl Icahn, R2 Investments sent a following letter to the 'independent' directors of XO Holdings. Reading this letter is an entirely different experience from the PR we have to wade through every day. It was clearly put together with great care, dripping with sarcasm, anger, and a certain resignation. I find R2's speculation about how Icahn's offer will proceed and evolve over the next few weeks to be rather compelling, although perhaps even a bit optimistic on the followup pricing.
Dear Messrs. Knauss, Dell, and Gradin:
Bravo to Mr. Icahn!
As you know, R2 Investments, LDC is the beneficial owner of more than 15 million shares of XO Holdings, Inc.'s common stock, and has sent each of you numerous letters asking the "independent" directors to protect minority shareholders' rights. Unfortunately, as we predicted would happen in the various letters that we sent each of you over the past year, Mr. Icahn is now offering to buy all the outstanding shares for an insulting $0.55 per share.
Under Mr. Icahn's tutelage, we believe that this board is on the cusp of stripping almost all value from the minority shareholders. It has taken this board almost four years to find a way to give Mr. Icahn this company, but after a long, arduous process, the board has almost completed its apparent goal -- finding a way to give Mr. Icahn all the assets and NOLs for as little consideration as possible.
For a moment, please humor us as we predict how the next few weeks will play out. The "independent" directors have likely already retained counsel and will negotiate with Mr. Icahn for an increased price. Mr. Ichan will "generously" increase his offer to $0.75 per share. The "independent" directors will trumpet their accomplishment and tout that they were able to increase Mr. Icahn's offer by over 35%.
There will be enough of an uproar from the minority shareholders that the new offer of $0.75 per share will likely be rejected and Mr. Icahn will not achieve the "majority of the minority" condition to his offer. Mr. Icahn will once again "generously" increase his offer to $1.00 per share and will threaten to complete the deal around the minority shareholders: by converting his preferred shares into common equity, he will be able to reach the 90% ownership threshold required to complete a short-form merger. Threatened by a squeeze-out, minority shareholders will then give Mr. Icahn his "majority of the minority." The Company will be his for $1.00 a share.
The shameful aspect of all this is that you, as "independent" directors, could have prevented this unfortunate outcome. You passed up numerous opportunities to refinance the Icahn-owned credit facilities during perhaps the most attractive credit markets in history from 2004 to early 2008, and you also ignored numerous other offers to purchase the company at much higher prices than what Mr. Icahn will likely offer the minority shareholders.
We were truly aghast when we learned through discovery as part of our attached lawsuit that approximately one year ago one of the potential bidders valued its combined bid for the assets and the net operating losses at approximately $10 per share. The fact that the board rejected this offer in favor of the massively dilutive proposal from Mr. Icahn only causes us to question further the true independence of the "independent directors." As you well know, the attached complaint that we recently filed in the Supreme Court of the State of New York shows that this board dismissed proposals from FIVE different bidders that would have each likely garnered more value for the minority shareholders than anything Mr. Icahn is going to offer.
Rest assured, we are going to do everything in our power to ensure that justice is served and that the rights of minority shareholders prevail. We intend to hold each of you personally liable to the maximum extent permitted by law for the numerous infractions you have committed in trampling the rights of minority shareholders should Mr. Icahn prevail.
The letter has been filed with the SEC here Hmmm, I think those just may be fighting words...
Actually, what they're doing is goading the independent directors into making a real stand to save their asses. Could it work? I doubt it, but it's a nice volley nevertheless from R2.
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