When one talks of a reverse split amongst competitive carriers, the subject is usually Level 3, since they have retained the explicit right to do so 'just in case' for many years now. But today in S-1 and PRE-14C SEC filings, XO Holdings (news, filings) unveiled its own plans for a one for twenty reverse split aimed at getting its common stock back on the Nasdaq Global Markets by raising its price above the $4 initial listing threshold. Such a listing has been a point of contention amongst investors ever since Icahn took the company out of bankruptcy court. So why now?
According to the filings, the purpose of XO's move seems to be to further enable the rights offering for a new class D non-convertible preferred stock that they are planning for this winter. According the the PRE-14C:
If the Company’s common stock and the related rights are listed on the Nasdaq Global Market, the rights and the new class of non-convertible preferred stock will, under Section 18 of the Securities Act of 1933, be a covered security in the case of the rights and senior to a covered security in the case of the new class of preferred, and therefore exempt from state securities regulation. This exemption (the “Blue Sky Exemption”) is important because, if achieved, it will enable the Company to offer the rights and related new class of non-convertible preferred stock to all holders of the Company’s common stock, regardless of the regulations in the holders’ states of residency. Without the Blue Sky Exemption, state securities regulation could preclude certain holders from taking part in the rights offering.
However, they can't be sure that they will succeed in listing on the Nasdaq, and would go ahead anyway if they failed to achieve it. I don't think the $4/share stock price is the only hurdle, I seem to recall some corporate governance issues as well such as a sufficient number of independent directors. But perhaps they have a few more cards to play yet.
Some might argue that reverse splits invariably lead to losses in marketcap. However, first of all that is not always true - Equinix pulled an R/S earlier in the decade and has done quite well since. And second of all, XO's marketcap is already depressed and far off the radar of most investors due to the Icahn factor. The prospect of increased visibility via an actual listing on the Nasdaq probably outweighs the negative connotations of the R/S.
The rights offering is aimed at raising as much as $200M to continue XO's spending plans, aimed at transforming its prospects - raising margins and moving to a growth footing. They want to do it without incurring straight debt and the covenants that would go with it.