R2 Ratchets Up Pressure on XO’s Independent Directors

August 4th, 2009 by · 10 Comments

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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Categories: CLEC · Mergers and Acquisitions

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10 Comments So Far

  • Bob says:

    You did notice, Rob, that R2 bought another 4.5 million shares in the last few days? I think that’s more than a “nice volley.”

    • Rob Powell says:

      Very interesting, I had read right past that little item so thank you for bringing it to our attention! It surely seems to imply that R2 is confident it will get a better price, and perhaps removes some weak hands for the vote – whenever that happens.

      But I’ll still stick with my “nice volley” comment for now, because Icahn still owns 90% and he will get what he wants eventually unless the courts step in or the invertebrates on the board grow some backbone overnight.

  • GXDude says:

    XO shares broke through 0.55 and is presently trading at 0.60, isn’t that odd to go above Icahn’s 0.55 buyout offer? This is getting interesting….

    • Rob Powell says:

      I think it is becoming clear that Icahn will have to raise his bid, hence the price move. However what would really shake things up is if Bidder 1 or 2 would make a public offer now above Icahn’s $0.55. Icahn says he won’t sell, but he can’t very well buy it cheaper and get away with it at that point either…

  • Tony D says:

    Aren’t we past all the M&A’s for right now (or at least this year) since all the others who did bid for XO have already put their money into other M&A’s?

    • fluids_only says:

      Not necessarily – TW has always been an obvious potential acquirer and their powder remains dry. Level 3 may be rumoured to be buying someone soon, but nothing has actually happened yet. Also there are at least a few foreign carriers (NTT, Tata, Reliance) who may be interested in this asset. If the credit markets are thawing and the deal accretative, I can’t see why it couldn’t be in play and moreover why the price (c. 1B) would have changed much. Of course given Icahn’s antics a sole bidder would be crazy not to now lowball!

      • Anonymous says:

        The point here is not whether some third party will buy XO from Icahn or not. The issue is the valuation of the minority interest. Five unsolicited bids well above Icahn’s offer are pretty obvious evidence he is trying to screw his minority shareholders.

        • fluids_only says:

          If suiter interest remains then their offers will represent a benchmark value that Icahn can’t claim to be purely historical.

  • Anonymous says:

    My prediction is that the offer will be recinded – end of story. Unfortunately, this leaves the minority interest with an investment in a company run by someone who has no interest in boosting their investment. The stock could fall back well under the current offer as a result. I hope I am wrong, because the minority has endured a lot of pain under the leadership of Icahn – which smells badly.

    • fluids_only says:

      You may be right – but what then is the endgame? It seems to me that the value of this investment for Icahn is pretty close to maxing out now – NOLS, decent valuation for the company that would take years of added capex plus the winds of good economic fortune to boost substantially – whereas the opportunity represented by having one billions cool ones right, for an investor like Icahn, is pretty huge. So sure, his ego might well get in the way, but as a matter of pragmatics it would make sense for him to follow this one through.

      Another consideration is R2’s litigation strategies. They are not simply challenging the value of the offer, there cases are also seeking a reversal of some of Icahn’s earlier manoeuvrings – which simply withdrawing the offer will not resolve.

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