XO Communications Inc. (OTC: XOXO) has topped Qwest Communications International Inc.'s (NYSE: Q) $390 million bid for Allegiance Telecom Inc. with a $411 million offer. The bid is chairman Carl Icahn's third play for a bankrupt carrier in less than a year.

With the deadline for bids now passed, and an auction set for tomorrow, there's a head-to-head bout between the RBOC and the CLEC, with potential bidder Corvis Corp. (Nasdaq: CORV) nowhere to be seen (see Corvis Gets Ready to Pounce).

While XO declines to comment on the matter, sources close to the process confirm that XO is the only rival to Qwest. And what of Corvis? The sources say it had made a bid prior to Qwest being chosen as the preferred original bidder, but has not returned to enter the auction process (see Qwest to Buy Allegiance).

It's not surprising to see XO step up to the plate, as Icahn, who won control of XO early last year, appears desperate to expand XO via an acquisition and turn it into a more significant U.S. player (see XO Reorg Plan Completed). And at least one analyst believes that a successful XO bid would make the CLEC itself an attractive target for acquisition by one of the RBOCs or IXCs. Such a scenario would give Icahn, who holds a 62 percent stake in XO, his exit strategy.

If Icahn walks away from the auction with Allegiance in his pocket, it'll be a case of third time lucky. Last summer he bid for international operator Global Crossing (Nasdaq: GLBC) while it was still under Chapter 11 protection, but lost out (see XO Steps Up Bid for GX, Court Chills Icahn's Global X Bid, and STT Investment in GlobalX OK'd).

He then made a move for the bankrupt U.S. assets of Cable & Wireless plc (NYSE: CWP), and entered into a very public war of words in the process (see Firms Fight Over C&W's US Assets). XO, again, was crossed out (see Savvis Bulks Up).

Now XO is up against one of the industry's big guns in Qwest, which is looking to extend its market reach and take on board about 100,000 business customers (see Qwest Scrapes Up Allegiance). As well as network operations in 36 U.S. markets, including metro fiber assets and a few hundred collocation facilities, Allegiance would bring annual revenues that currently stand at about $700 million.

XO has the money, $750 million cash, and ambition to come out the winner, according to Vik Grover at Needham & Co.. A successful takeover would give XO a monster boost to its current 20,000 business customer base, drastically extend its physical reach (its fiber network does not overlap that of Allegiance), reduce costs, benefit from adding key Allegiance executives to its team, and ramp up its current annual revenues of $1.1 billion towards the $2 billion-a-year mark.

Grover believes Qwest would not be inclined to raise its bid much higher. He says the RBOC's main reason for acquiring Allegiance would be to cut last-mile costs for its long-haul business, rather than as a weapon against its fellow regional carriers. Qwest is very focused on competing in its home 14-state territory, and the deal provides many more synergies to XO, which would be more likely to increase its bid further, Grover muses.

The auction will be held in the offices of Allegiance's lawyer, Kirkland and Ellis, and may continue until Friday. The winner's identity will be announced at an unspecified time between the close of the auction and February 19, when the bankruptcy court will conduct a hearing about the result.

— Ray Le Maistre, International Editor, Boardwatch