Finding a Buyer For XO

September 24th, 2009 by · 3 Comments

Ever since Carl Icahn’s bid for the 10% of XO Holdings (news, filings) he doesn’t already own and the subsequent revelations from the litigation by R2 Investments of two bids last year, I have wondered about something.  Where are those bidders now?  Not just those two – rumored to be Zayo and Paetec, but there have been other talks over the past few years with others like Level 3 and TW Telecom with whom there are obvious synergies.  Icahn is offering some $0.55 which translates to a pathetic net purchase price of about $730M – just six times 2009 EBITDA.  Surely someone can beat that?

Certainly XO’s minority shareholders are hoping for a white knight to make another offer, as it would aid their case even if Icahn blocked it.  Considering the fact that the credit markets were open enough to let Global Crossing rake in $750M recently, it wouldn’t seem that hard to pull off.  It doesn’t take much to sweeten the pot for minority shareholders, an extra $50M corresponds to another $0.27/share – half again as much.

However, the reason no bidders are making their presence felt probably is that the only people who care about Icahn’s buyout price are XO’s minority shareholders.  Potential buyers of XO realize that it doesn’t matter to them whether Icahn stiffs minority shareholders or not, because as soon as he has control he is very likely to split off the NOLs by dropping the assets and revenues into a subsidiary and selling them off.  After all, So actually, potential buyers of XO’s assets would rather Icahn get his way now rather than later, and they don’t care what price he gets it at so long as it’s low enough to make flipping it profitable.

Bidding against Icahn in this situation therefore is counterproductive, and any three-way negotiations (R2/Icahn/bidder) seem far-fetched right now given the level of rhetoric.  So despite the fact that XO topped Telecom Rambling’s summer survey of which fiber-based telecoms were most likely to get sold, a deal probably isn’t going to happen anytime soon if the legal standoff between R2 and Icahn/XO solidifies.

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Categories: CLEC · Mergers and Acquisitions

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3 Comments So Far

  • Anonymous says:

    Or not.

    Maybe a third party bidder is the way out of the R2/Icahn/Refinance Litigation mess. We all know Icahn wants to unload XO at some point and perhaps this is the time to do it. I don’t think a third party bidder would be necessarily bidding against Icahn. As long as Icahn can keep his NOL’s and make some money on his XO investment he will be more than happy to leave this thing behind and forget about R2 and all the nasty and expensive litigation.

    • Rob Powell says:

      The problem is that three-way negotiations are tough, and are virtually impossible when there is as much lack of trust as there is between R2 and Icahn right now. The only way it could work, IMHO, is if XO were to begin an open bidding process under Icahn’s blessing – in effect giving in to R2’s demands. Otherwise, the third party bidder would be stepping into a legal maelstrom.

      • Anonymous says:

        Make no mistake, this sale would be negotiated between just two parties: Icahn and the third party. It makes little sense for any ousider to negotiate with R2.

        My point is the ongoing litigation might actually provide an incentive for Icahn to sell XO now instead of later (Icahn will sell XO… it is just a matter of when).

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