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.
If you haven't already, please take our Reader Survey! Just 3 questions to help us better understand who is reading Telecom Ramblings so we can serve you better!
Categories: CLEC · Financials
Join Our LinkedIn Group
They also filed a s-1 today. did you read that.. there pricing the $200,000,000 rights offering at $21.97 a share. a 20 reverse split will only bring the common to $12.80 per share. so they must think this announcement will raise the price considerably or do they have something else up there sleve….here link to s-1 http://www.otcmarkets.com/edgar/GetFilingHtml?FilingID=7566655
Yes, I saw (and read) the S-1. As for pricing of the offering, my impression is that was just an example. We won’t know anything real about pricing until we at least know things like the interest rate etc. These aren’t common shares, so the pricing won’t be the same.
Reverse splits usually signal capitulation, a recognition the stock price is unlikely to recover, and part of a long term trend of poor results. The stock split in itself doesn’t cause the decline, but it is rather a symptom of a very sick company.
XO’s case is very different. The stock price has been manipulated at will by Mr Icahn and one can only guess he is doing it again. The announcement of an intention to get listed on NASDAQ is quite remarkable. The company would have to improve its governance, transparency (including analyst calls), visibility, and greatly increase the value of the stock.
The obvious question is why do it… looks to me Icahn is about to put the company up for sale or pull another transaction a la Alligeance (he did the exact same thing, announced intention to list the stock and then used it to buy Alligeance and the put a “For Sale” sign on XO’s door). Icahn might also want a much more valuable common stock to settle the litigation from minority shareholders for a lot less money.
In any case, Icahn might have abandoned his pursuit of buying out the minority shareholders for a few dimes. Time to increase the overall value of the company so he can cash in on the +91% of the stake he already owns.
It is all good news to minority shareholders.
In a way, this just might signal capitulation. Just not operational or financial capitulation, but rather the last gasp of the artificial status quo.
However, I certainly agree that an R/S here is not the same as in the classic examples, or anywhere else for that matter. XO is a unique beast now. That said, I’ve given up on saying that a given XO action is a prelude to a sale – by this time I’m the boy who injured his throat crying wolf too many times.
Rob,
This, to my way of thinking, is simply a couple of steps to make the rights offering more attractive/marketable. Ultimately the terms (dividend rate, etc) will be the main factor as will whether Icahn participates, but having a better defined market equity value and a stock that trades in a “respectable” market will benefit.
You also have mail (v. interesting)
Enron,
I still have a hard time believing Icahn is doing all of this to refinance 200 million. There are lots of easier and less expensive ways for XO to raise that cash. This guy has something up his sleeve and he is using the refinance to set up the stage (as he always does).
Homer– that could be the case, and certainly a senior debt deal would likely be less expensive than where they will need to price this preferred to sell. That said, he is opening himself up to a higher level of scrutiny and regulation through a NASD listing, so I don’t see it as a precursor to more dubious moves.
Enron,
I do not think the upcoming transaction is of the “dubious” kind… more likely an acquisition (or some sort of merger) or a sale of the company. The refinance is the screen that allows him to justify his sudden change of heart regarding NASDAQ listing (and all the things that it entails), putting out guidance, etc… .
I also happen to believe the recent cost cutting and improved SG&A numbers are part of the same thing: he is improving the valuation of the company and the value of the common stock price to get a better deal in the upcoming transaction.
is xo still around?
Yup….get used to it!
The only ones happy about a reverse split are the shorts. This is a gift to them. Very hard to short thinly traded, sub $1 stock. Watch this stock go up… and back down…
Looks like the reverse split will not take place… which probably means the preferred refinancing scheme is also out the window…. what now? anyone cares to speculate? share info?
A reverse split that pushes the common share price above $1.00 will allow institutional investors to buy it for their portfolios who were previously barred from holding a penny stock. Additionally, if it gets listed on a major exchange, it will automatically be added by tracking ETFs, index funds, and any mutual funds who hold the market or sector portfolio.
I believe, based upon past examples, that you might get an 8-12% share price boost in the first 1-2 weeks following the reverse split as this buying pressure comes in.
On the other hand, there shouldn’t be much selling pressure: your price per share rises, but your overall number of shares decreases – a net immaterial change. The business fundamentals remain the same as prior to the split, therefore there is no new reason to sell.
Overall, a short term gain in price above the post-reverse-split base price.
If this thesis proves incorrect for any reason, then the downside protection still seems to be the previous Icahnn offer of 80 cents per share (pre reverse split, so would have to be adjusted for this action), less any margin the market prices in as a result of expectations about permanently vanished offers or failure to consummate.
A risk arb situation therefore remains, as it has, even without a firm offer on the table: implicit 80 cent rejection gives a hint about shareholders’ beliefs.
What institutional investor in the right mind is going to invest in a company where Carl Icahn owns 90% of the company?