National fiber operator and CLEC XO Holdings (news, filings) this morning announced an expansion of its metro presence in the Los Angeles metropolitan area. They have had substantial network in the area for some time of course, but will now be adding additional PoPs in the area and extending their reach into the northern suburbs of Burbank, Glendale and Pasadena as well. This is the second time in a year that XO has put money into the LA market – last November they built out into the area known as the inland empire, which includes San Bernadino and Riverside.
XO has of late been spending more of its resources on expanding and developing its fiber assets and less on spectrum, copper, and the rest. In July they announced a similar expansion in Seattle, earlier this year they put money into Texas, and in the prior two years they expanded into Charlotte and Raleigh. That’s a good thing, and if they keep it up they just might bring those margins up to par with their peers someday.
The question hanging in the air though is just when and how they will raise money to fund the capex that projects like this require. The expansions will peter out quickly if cash flows continue to drop further below $100M. Will they break down and raise some straight debt? Seems like the sensible move right now unless Icahn intends to make another offer.
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Rob,
As you know I have been banging the drum for a straight senior debt offering to funs expansion. The balance sheet is debt free (although the Icahn preferred will require a refi at some point). Can a FCF breakeven company with an indifferent track record raise senior secured debt? you have to look no further than ITCD which did $325 million in senior notes (10.5%) in the Spring. ITCD is breakeven cash flow after CapX and now has debt/EBITDA in the 2.7x range.
It is Icahn’s agenda however that will determine the outcome here. I can’t really see any pressing reason for him to make another offer– he has everything he needs right now since the last financing got him access to the NOL. The shareholders must hope he is incented to grow value which should be the case unless he is being perverse in the face of the litigation and agita.
The end game– hope the actuarial clock reaches midnight at some point, as it surely will, and Mrs.Icahn sells the thing.
“I can’t really see any pressing reason for him to make another offer”
The reason for him to make another offer would be the fact he has an infinitely better view of XO’s future earnings than anyone else. If he saw no future improvements of EBITDA he would be putting lipstick on the company to sell it (which would include an effort to increase the price of the common). If he saw future improvements in EBITDA, he would come up with a way to appropriate those improvements by buying the minority stake on the cheap (which means he would go to great lenghts to depress the value of the common stock).
We saw Icahn put lipstick on the company when he purchased Alligeance using overpriced XO common stock (at that point he even announced the company would be listed on Nasdaq… the stock climbed to $8+ and he sold a bunch of common shares). His insistance on a dillutive transaction at this points tells us he is preparing a new offer based on an artificially low stock price.
FWIW, Icahn modus operandi typically includes the use of inside info (i.e. knowledge future earnings) and corporate control to underprice or overprice securities he wants to buy of sell.
Homer,
He has already tried to buy it on the cheap and got rebuffed. could he come back with a “fair price”? perhaps but my sense is the ego thing doesn’t allow that.
Could he sell the assets and keep the NOL? Probably, but if that were the case then likely he would be incented to increase the trading value– and he is not doing anything on that front. The history here also suggests he has no real interest in selling– the litigation discovery shows he turned down real offers in the past.
BTW Icahn has never sold one share of his common. He did obviously issue stock as part of the Allegiance buy (and those guys regret ever getting it) and he did once sell down some of his preferred (and that guy regrets ever buying it).
Icahn’s MO is no different than any rational investor’s MO (buy low, sell high and use all info at your disposal to achieve those goals) except in this instance his initial decision to buy was founded in large part on his ability to use the NOL to shield earnings elsewhere through the NOL lodged at XO. Only if he loses the litigation will that be at risk. Assuming the litigation is a loser, Icahn has what he wants. Hopefully Mrs. Icahn prefers cash.
My point is that Icahn’s failure to quickly and inexpensively capitalize the company is probably telling us something about what he is about to do (and how soon he wants to do it). As you correctly point out, another dillution 2008 style would probably be pointless (he already has the NOL’s and a marginal increase in the ownership of the company would probably not be worth the trouble). Now, taking out the minority stake for good… that’s a different story.
Plus I am not so sure he cares more about his ego than about money. If he really sees better Ebitda down the line he will readjust his offer and try again (this would be his 4th try to buy out the minority stake.. ego hasn’t stopped him before from changing his mind). And I don’t think the price would be “fair”. This guy has all the cards under his sleeve. It would just be high enough for the minority shareholders to cut theirs loses and walk away from the mess.
The Alligiance dillution was in fact an equity sale on the part of XO shareholders. XO issued a bunch of grossly inflated common which was used to buy Alligiance’s assets. Icahn was in fact much better off using $8 XO common to make that purchase than if he had used $0.59 XO common stock. And of course he didn’t sell his own stock, that would have probably landed him in jail.
Finally, on the litigation I doubt it will ever be tried. There is way too much at stake to put it in the hands of a judge. He really does risk losing something he already has: the NOLs.
“As you correctly point out, another dillution 2008 style would probably be pointless (he already has the NOL’s and a marginal increase in the ownership of the company would probably not be worth the trouble). Now, taking out the minority stake for good… that’s a different story.”
I fail to see why taking out the minority is, or should be, a key goal of his:
— he already has absolute control
— he has the NOL
— fwiw, he would lose a currency through the delisting of the stock that would follow
The only benefit would be getting rid of an irritant (the rightly litigous minority) and being out of the public eye– but to do that he needs to pay a price (probably $1.75– $2.00) that for whatever reason he has been unwilling to pay. Why hasn’t he?Perhaps because he doesn’t think he needs to?
Reasons for Icahn to take out the minority shareholders:
1) First, and foremost, it would allow him to capture of 100% of the upside. He would love to buy the 90+ million shares he doesn’t own and get the upside on those once he decides to sell the company. His control of the company and his treatment of minority shareholders should allow him to get quite a deal on those shares right now (even at $2).
2) The litigation risk is very real. There is too much uncertainty even in a trial without a jury (though I believe you can demand a jury trial in NY Supreme Courts). Unwinding the ’08 refi would not be a good outcome for Icahn. The un-doing of the wireline asset sale a couple of years ago shows what could happen (except this time he has something to lose, in the wireline sale he had nothing to lose but attorneys fees and an interest penalty… all in all I think 30-50 million).
Icahn has tried 3 times to take out the minotiry stake. First time with the failed wireline sale. After that but before the the ’08 refinance, buying out the minority stake would have been to expensive (probably $6/share). Then he tried twice after the refinance but low balled the deal too badly. I would no be surprised if he tries it again very soon (otherwise I simply cannot justify the current recapitalization shannenigans and repeated threats of dillution).
If the R2 litigation moves forwarded wouldn’t that put his preferred deal at risk of unwinding, thus loosing his ability to use the NOL’s and provide incentive for him to buy out minority shareholders at a fair price?
If R2 were to prevail then the remedy would seem to be recission of the last round of financing, and yes, that would threaten the availability of the NOL since his ownership would drop below 80%. But how that financing gets unwound is beyond me and I have never seen such a thing happen. So far, based on reading the tea leaves in the judges comments/questions, that result seems to me to be unlikely. The advice Icahn is likely getting is that he is not running too much of a risk in that happening– it isn’t a jury trial where any result is more of a crap shoot.
i continue to be fascinated by the fascination with xo on this board. honestly, who cares about them and why?
Anon– it’s simple– there are a couple of peed off XO shareholders on this board plus it’s a fascinating story of hypocrisy, ineptitude and attempted thievery. That and XO’s future has some bearing on many other long haul and CLEC players. It is a worthy subject.
Homer,
The wireline sale was not “unwound” because it never happened, but the ’08 financing happened and would be extremely difficult to unwind. As to the other subjects I will elect to leave those as disagreements which time will settle. This is a state I am used to, dating back to when you asserted that the XO stake was owned in the Icahn hedge fund (just plain wrong).
whatever dude… that was low… that comment was posted in a bulletin board at least a couple years ago… don’t even remember the context… in any case that was uncool… no one can’t argue with you… when in a corner you just play unfair… I’ll take my ball and play somewhere else… you are no fun (FWIW.. I think people got my point)
I wasn’t aware I was in a corner. But it probably was a bit uncalled for for which I apologize if it gave offense– there is something about the XO situation which brings out the bad en_ron.
Oh, one other thing,– you are clearly free to leave this site (although Rob will miss the clicks) but the terms of service do not permit you just to up and and take your ball back l– that is Rob’ decision to make. He is free to give you your ball back or keep it.
I’d throw in a new ball, but I’m afraid you guys might eat it.
nahhh… Icahn would eat it first
Icahn announced today he purchased 17.5 million shares of outstanding common stock in a private transaction. There are now less than 69 million shares left (only a bit over 40 million in market value at current stock prices). XO will go private very, very soon. A sweetend offer is a lot cheaper for Icahn than some sort of adversarial strategy.