R2 Fires Back, Aims At XO’s Board of Directors

February 16th, 2011 by · 18 Comments

Since Icahn made yet another bid for the rest of XO Holdings (news, filings) he doesn’t already own, there has been little news.  XO handed the task of evaluating the offer over to its special committee of ‘independent’ directors of course.  But yesterday we heard from the largest minority shareholder R2 Investments in a letter to those independent directors, and of course they came out firing.  It’s always a fun read, so here’s the text of the letter:

Dear Messrs. Knauss, First, and Gradin:

It appears that Mr. Icahn is back at his old tricks and is again trying to destroy minority shareholder value. We sincerely hope that the courage you displayed last time was not part of a grand scheme to simply help bolster your claim that you are independent this time. If you do not find a way to say “NO” to Mr. Icahn once again, we are going to be forced to believe that this was all part of your original plan to hand the company over to Mr. Icahn and will challenge it as such. How interesting it would be if there was some plan hatched by you all whereby you really always intended to sell the company to Mr. Icahn but felt it would look better to say “NO” the first time to prove your theoretical independence. We will be looking for this smoking gun. We will not be fooled and neither will the Delaware and New York courts!

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, Mr. Icahn seems intent on continuing to trample these rights and has now offered to buy all the outstanding shares for an insulting $0.70 per share.

For a moment, please humor us as we predict how the next few weeks might play out. The “independent” directors have likely already retained counsel and will negotiate with Mr. Icahn for an increased price. Mr. Icahn will “generously” increase his offer to $1.00 per share. The “independent” directors may trumpet their accomplishment and tout that they were able to increase Mr. Icahn’s offer by over 40%.

There will be enough of an uproar from the minority shareholders that the new offer of $1.00 per share will likely be rejected. Mr. Icahn will once again “generously” increase his offer to $1.25 per share and will threaten to complete the deal around the minority shareholders, which they may or may not be able to legally prevent. Threatened by a squeeze-out and tired of fighting, minority shareholders may succumb. The Company might be his for $1.25 a share. Our goal is to make certain this never happens.

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 continue today to forego any refinancing options in an apparent attempt to ensure that the company has no options other than to look to Mr. Icahn for help every time it needs money.

We were truly aghast when we learned that a few years 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, 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. It is overwhelmingly evident why Mr. Icahn has warned this board not to start a sale process as part of the steps that it would take to evaluate the fairness of his current offer – Mr. Icahn knows that by threatening to block any sale, there will simply be no other bidders. This is NOT the way to prove the value of this business. And we are certain the judges in Delaware and New York will agree with us.

Please imagine Mr. Icahn’s reaction if he were a shareholder in a company that simply sold itself at a deeply discounted price to its majority shareholder through a sham auction. Needless to say, he would pull all of the tricks out of his typical playbook – calling for the resignation of all directors, pursuing legal remedies, public diatribes, etc.

The only reason we can fathom that a director would allow Mr. Icahn to succeed in his continuing attempt to disenfranchise minority shareholders would be because of the relationships that the directors have with other entities controlled by Mr. Icahn. We did a cursory review of public information and found that the “independent” directors have numerous other connections with Mr. Icahn and his related entities:

Mr. Knauss:

* Current Director of WestPoint International – a company owned by Mr. Icahn’s entities
* Past Chairman of the Board of Philip Services – a company owned by Mr. Icahn’s entities
* Mr. Icahn’s director nominee in his proxy contest against VISX Technologies

Mr. First:

* Past Chief Financial Officer of Icahn Holding Corporation
* Current Director of WestPoint International – a company owned by Mr. Icahn’s entities
* Current Director of American Railcar Industries – a company owned by Mr. Icahn’s entities
* Past Director of Philip Services – a company owned by Mr. Icahn’s entities
* Past Director of American Property Investors – a company owned by Mr. Icahn’s entities
* Past Director of GB Holdings – a company owned by Mr. Icahn’s entities
* Past Director of Cadus Pharmaceuticals – a company owned by Mr. Icahn’s entities
* Past Director of Marvel Entertainment – a company owned by Mr. Icahn’s entities
* Past Director of PANACO – a company owned by Mr. Icahn’s entities
* Trustee for Tropicana Atlantic City Corporation – an entity holding Mr. Icahn’s Atlantic City casino interests

We firmly believe that you are making a mockery of the term “independent committee” and it will be the first thing we will be highlighting to a Delaware and New York judge. You are not independent! If you were any more closely tied to Mr. Icahn, you would be immediate family!

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.

Very truly yours,


SOURCE R2 Investments, LDC

I’d say things are getting ugly, but we’ve been there for a long time now.

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Categories: CLEC · Mergers and Acquisitions

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18 Comments So Far

  • carlk says:

    I don’t understand this! Call Enron! R2 investments believes in “CONSPIRACIES!,” believe it or not! 🙂 Either way, it continues to turn out that, if a man is going to attempt to play with a WOLF, he is going to get BIT BADLY with the risky of dying until that WOLF is removed from the equation. In the case of that CON MAN, ICON, the world’s investors will be better off when he finds his way to the two Bernie’s Big Houses! imo

    • Anonymous says:

      One must not underestimate GR’s bite. He has some serious staying power & has fought with Icahn many times!!! This will be fun to watch.

  • carlk says:

    It has to be one of the most poignant, articulate, potent, lethal letters to be imagined in favor of “minority owners” who have done their homework!

    I’m sure they have already with references to the courts, but I would send a resounding message to research the back grounds of those NY and Delaware judges who may have ties to ICON, and would be ready to throw them last minute “CURVE BALLS” based upon R2’s expectations during the conclusion of their claims.

  • Rob, how do you see this playing out? says:

    Rob, how do you see this playing out? Will Icahn finally get nailed for the hypocrite he really is.

    • Rob Powell says:

      Honestly, the big bad wolf rarely gets caught in the real world, and he’s still sitting in the catbird seat in all practical senses.

  • DP says:

    Let me get this straight. If I buy XO today for .79 and, as a worst case scenario, eventually sell my shares to Icahn for the insulting price of 1.25 I would make a 58% return on my investment?

    • fluids_only says:

      I think that’s pretty much right, with a catch. The questions are (i) how long will this take, (ii) is there a risk of dilution over this period and if so to what degree, and (ii) what is the opportunity cost of holding on for that period of time? The longer it drags on, the riskier it gets.

      Ultimately I think it comes down to whether you think there’ll be a result this year. If so, it’s a good opportunity. Otherwise, maybe I have some Level 3 shares I could sell you 🙂

  • Anonymous says:

    Actually, I doubt any of these lawsuits go away for anything less than $2.00 a share

  • mhammett says:

    I’m getting tired of hearing about this. Just let him have the damn thing already.

    • Anonymous says:

      I’m sure if Icahn pays a fair price the minority shareholders, including R2, would be more than happy to let him take the company private. The problem is Icahn has trampled on the rights of XO’s minority shareholders since the day he bought the company’s debt out of BK. It’s amazing that know one in the media has ever brought to light how Icahn may just be the biggest hypocrite to ever walk this earth.

  • Carl Icahn, in his capacity as majority shareholder and Chairman, has repeatedly ignored or abused his fiduciary responsibilities in order to manipulate XO’s value for his benefit at the expense of minority shareholders. The hand-picked cronies on the Board of Directors are in place to serve Icahn’s best interests, not the company or minority shareholders.

    Mr. Icahn must be exposed for the fraud that he is and held accountable for his blatant malfeasance. In spite of his actions, XO Holdings operationally is strongly positioned for growth and I will hold my shares until their true and fair market value is realized.

    I’m confident that the pending class action suits & ongoing litigation involving R2/Scepter Holdings will convince Mr. Icahn that he is not above the law & that his consistent abuse of minority shareholders rights have consequences.

  • anon says:

    i like this blog because it attracts all the smarties. maybe you guys can help me understand the “much ado” about this story?

    why is xo worth anything at all? a quick check of their 9-30-10 filings shows that they have no income at the P&L line, negative stockholder equity, no tangible assets, current liabilities which exceed current assets, and their only tangible assets to speak of are “property plant and equipment.” but we all know that the last time this company and the other IXC’s and CLEC’s went through BK, these “assets” were worth about .05 cents on the book value.

    everyone is made that icahn is allegedly running the company for the benefit of its tax NOL’s but it isnt clear to me what else he could do? this company is a destroyer, not creator, of value. they have no unique assets (dark conduits aren’t assets until they are lit and produce revenue — others lease strands and multiplex). as such, it appears that they do not have operations which produce results in excess of cost of capital and capex needs, etc.

    if XO was a division of a large public company, it would be booked as a liability. perhaps .70 cents is better than zero in the next BK ?

    • Rob Powell says:

      XO does have unique metro fiber assets that they built themselves back in the bubble. These have value now in the eyes of many, in that using them properly would raise margins and hence the value of the currently mostly worthless revenue pile they sit on. Metro assets weren’t worth much when the last bubble popped, but they are making people money now if in the right hands.

      Clarification to your statements though, they have no intercity conduit, that fiber is an IRU from Level 3.

      • Anon says:

        Thanks. Regarding the inter city assets, i thought they actually had a physical conduit in the L3 package of conduits. Either way, the point remains that 4 strands and DWDM gear is, for the time being, an asset of equal or similar value. Actually, unlit, the excess stuff = a liability.

        I suppose their fiber in the metro is valuable, but this didn’t much help ICG, McLeod, et al. Customers paying money in excess of costs is valuable. Franchise agreement and re-sold Bell lines are less valuable, if valuable at all.

  • anon says:

    some typos, above. meant to say that dark fiber and empty conduits have no value.

    also, worth noting that ultimately the Free Market is a powerful check on these activities: If R2 or anyone else thinks the company is worth more, they can Buy Shares, Tender for Blocks of Shares or Make Offers on assets. Litigation is a silly way to set a value — a market needs a litigator like a fish needs a bicycle (credit to U2 / bono).

    are these guys a hedge fund or a law firm ??

    • Anonymous says:

      “Buy Shares, Tender for Blocks of Shares or Make Offers on assets ”

      There have been plenty of unsolicited bids for the assets (and even for the company as a whole) but Icahn just doesn’t want to sell. In the meantime Icahn has managed to increase his holdings of voting shares from 51% of the company to well over 90% thorugh self dealing transactions (and thanks to his absolute control of the board of directors who have essentially handed over the company to him for free). Literally every investor who has tried to accumulate positions in XO has been rewarded with a move from Icahn that instantly dillutes their investments and hands over the even more voting shares to Icahn. Unfortunately the only way for minority shareholders to fight back is through litigation. I am surprised there are only 5 or 6 class actions suits against Icahn and his handling of XO.

  • Anonymous says:


    Are you sure about that IRU? I was almost certain XO exercised an option within the last 3 years that was done originally with L 3. If memory serves me XO owned 25% of the joint trench however XO used IRU’s from the beginning because L 3 made them such an attractive deal plus they didnt have the cash to lite it. Then when Icahn gave them the needed capital in 07 they lit there own assets with Infinera & was sued by L 3 in which XO prevailed. I could be wrong but I don’t think so but would appreciate your research on the subject.

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