Now that Carl Icahn has gotten what he wanted, access to the $2-3B in net operating losses, or NOLs, that XO has been sitting on, it is time to look at what happens next. Does Icahn intend to operate the business on into the future? I suspect not, his money has sat here longer than it usually sits anywhere, and he hasn’t shown actual interest in telecom in quite some time.
I came across an interesting tidbit in XO’s 2007 10-K. It turns out that Icahn already had access to the NOLs during 2003-2004, and he used them. Here is the quote:
For the period January, 2003 through January 2004, the Company was a member of an affiliated group of corporations which filed a consolidated return with Starfire Holding Corporation (“Starfire”), the parent entity of an affiliated group of corporations controlled by Mr. Carl Icahn. In January 2004, the Company deconsolidated from Starfire and under a Tax Allocation Agreement, Starfire will reimburse the Company each year going forward for the excess of the Company’s actual income taxes over the income taxes the Company would have owed if net operating losses or other tax attributes used in prior periods by the Starfire affiliated group were still available to the Company. The Company’s net operating loss carryforward has been reduced by the amount used by Starfire in 2003 and 2004. No amount has been recorded for potential reimbursement from Starfire under the Tax Allocation Agreement.
So in 2005, apparently in order to fund the Allegiance Telecom acquisition, Icahn actually gave up his access to the NOLs. It seems to me that at the time he intended to operate the business, that it was worth more that way since it would have scale. However, things didn’t turn out so well and the resulting business hasn’t lived up to the dream, so he has since been trying to get the NOLs back on his own terms. In late 2006 he tried to buy the wireline business (presumably with the NOLs), but was blocked and he gave that up in 2007. This year he succeeded with the latest refinancing deal, even though he must give back 30% of the tax savings he realizes.
What all this tells me is that he really has no more interest in operating the business, and we can expect him to now separate the NOLs and sell the rest. Well, perhaps not *now*, but it is the next step. It isn’t that hard to do from a tax standpoint it seems. The assets are already in a lower tier than the NOLs (XO Communications versus XO Holdings), apparently in order to keep the NOLs usable the business holding the NOLs must continue in that business for two years in some form, which is easy to satisfy. XO can easily sell the wireline subsidiary and retain the NOLs, and since Icahn now has access to those NOLs he really has no reason to keep the wireline assets around and they are worth more in other hands.
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The natural next question is how much would have to be paid to acquire XO—–assuming the NOL’s remain with Icahn & the co cash remains with Icahn ? Am interested in all opinions on this topic . The stock is currently trading at $.47 !
Rob,
As you know, it has always been my conviction that the NOL’s were a key part of Icahn’s plans here. In the proposed wireline sale the NOL’s went with the wireline assets (to Icahn) which would have represented the steal of the decade. Now he has full access with some value reimbursement obligation ($95 million)to the XO corpus. What’s next? I don’t know, but what I do know is that this revenue base is worth more to someone else –adding to scale and density– than it is to Icahn. As to price, valuations have come down dramatically in the last nine months as fear of enterprise recession has grown, but I still feel that if an acquiror could figure on getting the asset at a post synergy 4-5 times EBITDA then it would be a solidly accretive deal. If you figure RR EBITDA at $110 million and $170 million of savings then you get a price of $1.1 billion on the low end. That would get you $2.00 per share with the new capitalization, with the wireless assets left in the Oldco and Icahn still in control of the NOL for his consolidated group. That seems to make sense as an outcome but it is not clear who pulls the trigger on that deal. Maybe Q, LVLT (at some point) or TWTC. So, I think value exists at 47 cents for XO.
en_ron_hubbard,
I would generally agree that $1.1B or a little more is probably what the wireline business will bring. I think that with the completion of the refinancing, the roadblock to a deal is now gone, but it has been replaced by a chasm in financing. I think only TWTC could pull off a deal right now because its stock price remains high enough to use as currency, anyone else will wait for a window in the debt markets.
For Enron & Rob,
1.1 bil price—— would that include the 440 mil in cash & the payments for the NOL’s used ?
The benefits to lvlt are clear — can others achieve the same benefits ? Are there many bidders for XO ? Is it a buyers mkt ?
XO has a bad business plan—-it wen’t bk once & will continue to get worse on a standalone basis . The clock is not on Mr Icahn’s side . The value of this co continues to erode— I do not see anyone having to pay top $ for XO .
Two reports from small customers are horrendous—- Each reported that this is the worst co that they have ever dealt with & will drop them as soon as practicable .
I would say that we have seen this story before. Sometimes when they hold out for a while, it works out ok (BWNG) and sometimes they get hurt (WilTel). Icahn is a stubborn guy, I think he holds out for a good price despite the risks.
As for other bidders, I find it easier to make a strategic case for Q or TWTC buying XO than LVLT simply due to customer focus and asset fit. LVLT would want only one thing from XO, their fiber and nascent wholesale biz. Until a few days ago, PAET would have been a candidate, but they seem to have problems to work out first.