XO Agrees To Sell To Icahn’s ACF

July 12th, 2011 by · 34 Comments

Well, it took six months, but the board of directors at XO Holdings (news, filings) finally responded to majority shareholder Carl Icahn’s crazy bid of $0.70 back in January for the common shares he didn’t already own.  They did get a higher price than that original bid, agreeing to $1.40 per share plus contract rights to a share of the proceeds if Icahn sells the company within a year.

This was always the most likely scenario, with a higher negotiated price but no apparent actual bidding process.  The company hired JP Morgan Chase back in April to advise it when Grivner left and there were rumors to the effect that third parties might be kicking the tires.  But in the end Icahn had always said he wanted to buy but wasn’t at all willing to sell.

While $1.40/share is a premium of 109% above the current share price it will likely not satisfy the minority shareholders of the company who feel the thinly traded stock has been artificially depressed.  $1.40/share corresponds to an EV of $1.124B and a trailing 12 months EV/EBITDA multiple of about 5.7.  Icahn owns 91.76% of voting shares, and hence can close this deal without a vote – although the plaintiffs in several pending lawsuits are sure to ask the judge to stop it.

While most of XO’s revenue derives from the more traditional CLEC business, the company has extensive fiber assets including a national fiber backbone that derives from the original Level 3 build as well as 9000+ metro route miles hooking up 3300 on-net buildings, mostly in the downtown areas of a few dozen major metro areas.  In the past few years, they have focused more and more of their efforts on leveraging that fiber, seeing some success.

Icahn’s main interest in XO has always been the tax benefits of its net operating losses.  By acquiring the rest of the company he can fully separate the NOLS from the business, and then later sell off the assets.  Or, he could decide to run the company and use it as a consolidation platform – although if that were his aim I think recent history would have been quite different.

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Categories: CLEC · Mergers and Acquisitions · Metro fiber

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34 Comments So Far

  • Anonymous says:

    If Icahn does not have a rich deal to sell the company, I doubt the minorities go away.

  • Anonymous says:

    with the 1 year contract right if company is sold does this put the final ending of the XO Story on ice for another year ? Maybe just in time for Level 3 and Global Crossing to have made progress on merger and be ready to make another move or at least partcipate in a biding war that if ifwnet today they probably could not.

    • Rob Powell says:

      Perhaps it also offers a way for Icahn to settle it all before then if the lawsuits go badly. It depends on what exactly the 1 year contract right entails.

      • en_ron_hubbard says:

        The one year sale provision is just “schmuck insurance” for the BoD. Icahn will just wait for that to expire and then figure out what he wants to do. Another aspect of this whole thing is how this impacts the extant litigation– since at this price the Class B doesn’t get to convert and it was this feature that was at the heart of the self-dealing claim. But, of course, that’s a bit circular.

  • Anonymous says:

    To me the timeline is all too fishy. ABVT deal stalls over the weekend. XOHO lawsuit certified last week. Still no CEO. Icahn being deposed tomorrow. He knows he is going to have to pony up more UNLESS there is a deal which there may very well be given the aforementioned points. The non-transferable portion of the 1yr clause even adds further fuel to the fire.

  • Brian CZ. says:

    So he does what with the company. Don’t they have like 5,000 employees?

    • Rob Powell says:

      About 3650 employees as of February according to the 10-K. This whole soap opera has left that an open question for many years. Obviously if he eventually sells it to a strategic buyer, there would be layoffs.

  • Anonymous says:

    If you are forced to also deliver a sale of XOHO to appease minorities and get this business finished for ACF what I would do is get an opening offer on the table as we heard today and know that it would only be acceptable if a sale process had begun say with one or more of the rumored bidders for ABVT to sweeten the pot enough to get the deal done.

  • Your not going to get off that easy Carl says:

    Unless this offer increases to at least $2.50 a share, the courts are going to be really busy over the next couple of months. Valuing XO at $1.1 billion after all the transactions that have taken place in the industry over the last couple of years is laughable.

  • Anonymously says:

    We all know Carl is known to buy companies and sell them off. We knew it will evenutally come to this when he invest couple of years ago. My question is when he does sale the company what company would be inerested in buying it?

    • Rob Powell says:

      If the lawsuits don’t make him change his plans, my guess would be that he waits a year, then puts it up for auction. TW Telecom, Zayo, PAETEC, Earthlink, Level 3, and perhaps a few others would be at the table.

      • Anonymously says:

        In lameman terms what exactly is this lawsuit about. From understanding XO is trying to stop the merger with GC and Level 3 but why.

  • Anonymous says:

    Enron & Rob,

    The schmuck insurance assumes that R2 capitulates and takes this opening offering, if they don’t the litigation continues as well as this trial which only gets resolved if TWTC has already in fact won the auction.

    • en_ron_hubbard says:

      It’s not “an opening offer”. We should assume that a well choreographed and documented dance of back and forth negotiation has occurred with the Board getting the price up from 70 cents. This will be set out in the Information Memorandum we see in the next week or so. Now the question is whether a judge will enjoin the closing in the face of this process. The one year protection (schmuck insurance) is typical in these sorts of circumstances and gets the minority very little.

      The existing litigation can of course continue post closing which likely means a judge won’t stop a closing from happening– since the litigants aren’t adversely impacted.

  • Anonymous says:

    It is an opening offering externally. Yes the special committee and CI may have fake haggled but this has no blessing from the party at risk of expropriation.

    The question again comes back to the ‘independence of the special committee’ which the minorities will have to not believe to be in doubt, at 5.4x ebitda, it doesn’t look all that independent as it is less than half of the multiple L3 trades at currently for what can be argued is the same backbone, has much more room for growth plus what CI would argue is a better Balance sheet and less execution risk.

    • en_ron_hubbard says:

      The 70 cent offer was “external” and the question of the Special Committee’s independance is already part of the existing litigation which will very likely continue. XO’s backbone asset is leased from LVLT and represents only a small part of what LVLT owns. None of that changes the fact that $1.40 is too low to qualify as fair — but that too will be litigated.

      XO will likely be a precedent case in Delaware law as to process and fact in insider purchases of public companies–i.e. does the “entire fairness” doctrine require consideration of potential third party interest– but that may not get the minority any more money. We will see.

  • Carlk says:

    LVLT’s backbone and “premium” being afforded by the market(enterprise value/ebidta multiple) can hardly be considered the same backbone as CI’s xoHO.

    At best, while excluding the plentiful assets beyond their long haul network and excluding the fact that xoHO’s fiber is old, it could be argued that its multiple shouldn’t be more than 1/12th of LVLT’s multiple while accounting for the # of total conduits LVLT has sunk into the ground.

    BTW, if you’re really talking about EBITDA multiples for equity owners only and not EV/Ebitda multiples accounting for equity and debt owners together, than at today’s market caps, the combined (3)/Global is trading at $6.59B, and just 5.38 times the $1.25B Ebitda without synergies out of the gate, and without seeing fresh Q2 numbers for extrapolation.

    Because of the debt factor and CI jettisoning its debt via BK and subsequent machinations, you’re talking apples and oranges examining (3)’s Enterprise/Ebitda multiple vs. CI’s Equity owner/EBITDA multiple.

    Isn’t it amazing for xoHO equity owners that a double overnight is still significantly better than the less than doubling of (3) equity owners since the Global deal was announced. It’s also ironic that Global owners have more than 2.6 times their equity since the AMALGAMATION news as well! That’s more than two doubles and one half!

    If (3) did the same(2.66 appreciation), we’d be at $3.60 pps. Of course, Global owners would have went even higher relative to the sixteen ratio, but hopefully I’ve made my point!

    • anonymous says:

      Don’t be so sure.

      If TWTC, PAET, Zayo, and/or other get involved, XO is worth a lot more than you dreamed.

  • Anonymous says:

    enron i’ll concede for the time being bc I enjoy this banter too much but what I think is also surprising and ignored(only b/c it is today is it being ignored) other than our schmuck insurance is that there is an annualized XO arb spread multiples larger than the L3/GX spread ever was.

  • Bill Stockmun says:

    Interesting to note that the stock has not traded yet at the offer price. If you want out you will still have to pay a Carl Icahn premium of 6 cents or 4.2% today to exchange your shares… if you bought it below 70cents I guess that is just life and you go with it or wait for the stock to slowly stabilize like it did with the 70cents offer.
    Curious to hear what Icahn will be telling the court today.

    • Anon says:

      In around 70 and out at $1.35. I gladly paid 5 cents to be out of this god foresaken stock…

      • $mart$ says:

        This is a HOLD/BUY here for a DOUBLE!

        The ‘real’ merger deal has likely already been struck, but will not occur until after XO is ‘private’. This low-ball stunt is NOT the final outcome.

        Penny players that built positions have sold. Some long term bagholders who have waited for ANY opportunity to bail will now do so. They will never have to be paid the true valuation of at least twice the low-ball $1.40.

        It’s clear now that Icahn never imagined that the minority & R2 lawsuits would stop him cold from stealing XO & the NOL’s to the point where he is being deposed. Without the complications of trading publicly, the settlement of the litigation & sale of XO to a 3rd party at fair valuation should conclude by the end of the year.
        If you can wait that out to DOUBLE your investment DO NOT SELL!

        • Anon says:

          That might be the case. But never complain about a gain on the stock market. And it’s XO, They’ll manage to mess that up somehow…

      • mhammett says:

        I think that’s all this anti-Ichan thing is about. People bought stock at the wrong time, are pissed off the telecom industry tanked and will just piss and moan until they’re finally put out of their misery.

        • Brian Boru says:

          Have you read any of the court case? Grivner and Freiberg say in emails that the stock price needs to held below $1.50 per share in order for Icahn to stay above 80% ownership and be able to use the net operating losses against profits in other companies. They are managing the stock price down. This is clearly illegal. I have made money in XO but I don’t think that means I should sit back and let Icahn buy my shares at prices that have been deliberately manipulated down. Icahn has stepped over the line this time and is engaged in criminal activity.

          • Frank Freyers says:

            Where is the proof linking icahn to the above described actions? What you have above perhaps is criminal but more failure on CEO and CFO fiduciary responsibilities but I have scoured the docs and not seen any direct evidence linking icahn. If someone has it please share as I for one would love to see the merger stopped and the buisiness sold.

            • Brian Boru says:

              There is continuing discovery. XO has not provided all the documents requested. So there may be further evidence. The emails that we have seen were to a member of the BOD who is also an employee of Icahn. There is undoubtably more evidence forthcoming and I do not think the court is going to believe the chairman of the board did not know of the stock manipulation scheme that existed to benefit his activities in an unrelated company.

  • Brian CZ. says:

    Won’t R2 investments just tie this up in court?

  • Brian CZ. says:

    Rob, How do you see this whole thing playing out from the merger, to possible suitors etc…effects etc…

  • schmuckinsurance says:

    I am not sure this mess can go away without a significant bump ($1) from Icahn’s current bid….


  • schmuckinsurance says:

    The Grivner quote says what we all knew. I do agree, it is quite hard to say that an incremental $1/share would do it but it would get you closer to value and a number out of thin air that I think Icahn knows he will have to cough up that may be realistic to him.

    For us, we would also need an extended & more robust CVR, damages awarded and fair value. I think the only way it is in fact resolved is an auction which provides fair value today based on the assets plus a tobacco-company like legal settlement for damages.

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