As XO Turns: The Fight Continues

It seemed everything was over last week when Carl Icahn and XO came to terms on the refinancing of its senior debt.  The terms were steep but not unexpectedly so, but apparently the game is not over.  Today R2 Investments/Amalgamated Gadget filed a letter with the SEC announcing its suspicion that minority shareholders were taken advantage of, here is part of it:

In one fell swoop, the Issuer’s “Special Committee of the Board of Directors,” all of whose members serve on the board at Mr. Icahn’s discretion, are allowing Mr. Icahn to gain control of over 80% of the Issuer’s shares on a fully converted basis and obtain access to over $900 million of the Issuer’s tax losses to offset his own taxes. Should Mr. Icahn acquire just a few additional shares to raise his ownership percentage to 90% of each class of the Issuer’s stock, Mr. Icahn would be able to execute a short-form merger to completely eliminate the ownership rights of all minority shareholders without all of the standard protections provided to minority shareholders in a self-dealing transaction. Despite the extremely dilutive effects and obvious potential conflicts of interest associated with it, the Issuer provided no advance notice of the preferred stock issuance.

There were a few interesting items in that paragraph.  Firstly, I had assumed that given the previous public letter from R2 and the delays that followed, that the refinancing XO and Icahn pushed through had at least the tacit blessing of R2. Apparently that was not a valid assumption, R2 claims no notice at all – apparently they learned when we did.  Hence I must now conclude that the concessions Icahn made were a pre-emptive measure to strengthen the case that XO got the best deal it could.  Especially the part about returning 30% of the tax savings to XO, that offers XO cash that they can’t get anywhere else: a way to get 30 cents on the dollar for an asset they have little prospect of monetizing any other way.  Secondly, I hadn’t realized how close Icahn would be to 90% ownership, would he really go that route?  I’ll have to think about that one.

But while there are demands for information here and a threat of litigation, that is all so far.  How long will this stage take to play out?  Will it preclude any M&A until it is done?  Stay tuned, I’m sure Icahn, Grivner, and R2/Amalgamated will get on with the next chapter eventually.

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