XO Finally Files for Bankruptcy

While most of the victims of last year’s telecom Armageddon have seemed to go under with amazing speed, XO Communications Inc.’s (OTC: XOXO) death has been a long and slow one. After flirting with bankruptcy for more than seven months, the company filed for chapter 11 this morning (see XO Files Chapter 11).

The Reston, Va., company had been hoping to negotiate a restructuring agreement with its creditors before filing a prepackaged bankruptcy plan, but after several attempts at reaching deals with different parties, the cash-strapped company finally took the plunge today.

Loaded down with $8.5 billion in debt and with a stock that once traded at more than $60 a share now going for less than a nickel, XO follows a long line of service providers that have filed for bankruptcy over the last year. That list includes companies like 360networks Inc., Global Crossing Ltd. (NYSE: GX), KPNQwest NV (Nasdaq/Amsterdam: KQIP), McLeodUSA Inc. (Nasdaq: MCLD), Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX), and Williams Communications Group (NYSE: WCG) (see KPNQwest's Midnight Hour , MFN Falls Into Chapter 11, GlobalX: The Burst Bubble, and Williams Goes Into Chapter 11).

“This is just an outcome of a change of investor philosophy,” says Guzman & Company analyst Patrick Comack. “The industry turned its back on money-losing businesses.”

In today’s filing, XO listed $8.7 billion in assets and claimed to have had approximately $555 million in cash at the end of April.

Less than two years ago, XO, formerly Nextlink, was proclaimed by many observers to be one of the most likely service providers to survive the crunch. That aspiration started crumbling last November when the company announced that it would attempt to restructure its balance sheet with the help of a juicy injection of $800 million in cash from notorious buyout firm Forstmann Little & Co. and Mexican telecom giant Telefonos de Mexico. In exchange, the two companies were each asking for a 39 percent stake in the company. Forstmann had already invested $1.5 billion in XO.

The Forstmann/Telefonos deal, which was signed in January, was quickly challenged by the company’s largest bondholder, financier Carl Icahn, who proposed to hand over $550 million in cash for a 55 percent stake in the company (see Distressed Telecom Assets Pile Up).

"The Icahn investment shows that this one [unlike many other struggling telecoms] smelt and looked correct,” says Frank Dzubeck of Communications Network Architects, which has been an XO customer for several years. “This is a viable entity.”

That tug-of-war, however, seems to be ending with both parties simply dropping the rope. Icahn pulled his offer several weeks ago when he couldn’t reach an agreement with XO's creditors, and Forstmann/Telefonos announced that they wanted out of their deal last week, among other things because of the sharp decline in the value of XO since their negotiations started.

The fact that two major buyout firms are backing away from XO is a good thing, according to Davenport & Co. analyst F. Drake Johnstone. “The buyout firms have more exposure than the banks,” he says. “They realized that they were piling debt on top of debt… It was just throwing good money after bad.”

Although XO has stated that it has no intention of letting Fortsmann/Telefonos off the hook, the company said today that it is also considering an alternative standalone plan in which its bank creditors, led by Toronto-Dominion Bank, would be responsible for financing the restructuring. According to the plan, the $1 billion XO owes its bank creditors would be converted into common equity and $500 million of pay-in-kind secured debt (see XO Won't Drop Stock Agreement).

While some observers say that XO is likely to make it through bankruptcy, and reemerge as a profitable business, others say it would be better for the industry if it didn’t. “The telecom industry needs companies to go out of business and not to reemerge,” says Johnstone.

Banks are not the only ones that stand to lose at least part of their investment in the bankrupt telecom. The company’s founder and largest shareholder, Craig O. McCaw, has seen his entire 31.4 percent stake in the company disappear.

Who else is hurt by the bankruptcy? Other struggling carriers, like Qwest Communications International Inc. (NYSE: Q), WorldCom Inc. (Nasdaq: WCOM), and Williams Communications, along with equipment vendors like Nortel Networks Corp. (NYSE/Toronto: NT), Lucent Technologies Inc. (NYSE: LU), and Cisco Systems Inc. (Nasdaq: CSCO) are featured on the list of XO's unsecured creditors. Observers say that, while the carriers probably don’t have to worry about their investments just yet, since no one is likely to pull the plug on XO's services in the near future, the equipment vendors stand to lose any money they put into the company as vendor financing.

"XO Communications is a customer,” say Nortel spokesperson Tina Warren, “however, we currently have no significant financial exposure.” According to XO's bankruptcy filing today, the company had nearly $5 million in unsecured debt with Nortel at the end of April.

In today’s statement, XO said that the bankruptcy filing is limited to the parent company XO Communications, and should not affect any of the company’s operating subsidiaries. It also stated that it does not expect any layoffs or facility shutdowns in the wake of the filing.

— Eugénie Larson, Reporter, Light Reading
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BobbyMax 12/4/2012 | 10:15:19 PM
re: XO Finally Files for Bankruptcy From the perspective service providers, there is no need for a company like XO communications to exist ands be in business. Prolonging its business means means more pain for the investors.

The XO wants to stay in business so that they can gobble up the rest of the cache plus any other money they can manage to scoop fom either banks or private investors.

I do not think their XO, claim of having $7.5 Billion appears to be patently false. It is just a ploy get more money and live off comfortably as long as possible. American dream realized! What an accomplishment!
Horkus 12/4/2012 | 10:15:18 PM
re: XO Finally Files for Bankruptcy This is horrible news for the telecom industry.
If the RBOCs are the only ones standing, what will push new emerging technologies.
I had a thought that maybe the RBOCs themselves are going to compete against eachother - and this will stimulate new eqiupment growth.
Does anyone agree with me on that one?
A service provider's view 12/4/2012 | 10:15:16 PM
re: XO Finally Files for Bankruptcy I'd like to agree but I don't see what drives the RBOCs to compete. For an RBOC to compete "out-of-territory", capital investment is required (not a popular subject these days) and they risk retaliation from the out-of-territory RBOC. Why risk it? It's easier to take a defensive position and only respond if someone threatens their territory.
lob 12/4/2012 | 10:15:08 PM
re: XO Finally Files for Bankruptcy > I'd like to agree but I don't see what
> drives the RBOCs to compete.

Well, it is the existence of companies like XO, which can potentially threaten RBOC's lunch by deploying newer technology and leveraging data-centric network to go into voice business.

The claim by that analyst (isn't this word became kind of synonymous to "the one who has no clue"?:)
F. Drake Johnstone that telecom _industry_ needs companies going out of business is completely bogus. The industry needs competition, not regional monopolies.
gardner 12/4/2012 | 10:15:06 PM
re: XO Finally Files for Bankruptcy
Well, it is the existence of companies like XO, which can potentially threaten RBOC's lunch by deploying newer technology and leveraging data-centric network to go into voice business.

I dunno. I'm not sure that these kinds of companies ever seriously threatened the RBOCs. I know that is the cherished myth of the internet age but I think the proof has been in the pudding. No one seriously threatened the RBOCs except other RBOCs. After they were done gobbling up each other to almost completely re-assemble the Bell network prior to the 1983 divestiture they became invincible.

Ironically, I believe it was the very belief in the myth that crippled those who might otherwise have eaten the dinosaur's eggs. The CLECs and fellow travelers believed the myth with quasi-religious fervor and that caused them to discount the natural advantages the ILECs had going into the game. Without respect for the power the RBOCs had the ILECs didn't even attempt to find ways to overcome their advantage. It was all going to be soooo easy. The dinosaurs would leave their eggs unguarded and the nimble little warm blooded ILECs would eat them. Not only were the dinosaurs more formidable than the myth predicted but how tasty the flavor of warm blood was to the cold-blooded lizards! And everyone lived sadly ever after. ;-)
cisco_deepthroat_speaks 12/4/2012 | 10:15:05 PM
re: XO Finally Files for Bankruptcy gardner, we'd all have been better off if you didn't post those kindergarden thoughts at all. you don't even understand the difference between ilec or clec.

i have seen first hand an rboc most threatened by time warner (cable), not the 2 clecs operating in this 1 million person city. this is what finally motivated them to deploy dsl, to protect the voice line. otherwise, they'd have never deployed dsl. they felt no threat from the clecs, who by the way are teetering on bankruptcy.
gardner 12/4/2012 | 10:15:05 PM
re: XO Finally Files for Bankruptcy Whoops! Change ILEC to CLEC.
netskeptic 12/4/2012 | 10:15:04 PM
re: XO Finally Files for Bankruptcy > If the RBOCs are the only ones standing

If CLECs, GXs, WCGs, XOs, WCOMs etc were busy lining up pockets of their executives without even a thought directed toward real business development, there will be nobody else but RBOCs standing by the end of the day.


A service provider's view 12/4/2012 | 10:15:01 PM
re: XO Finally Files for Bankruptcy Bottom line is the RBOCs have no driver to compete against each other and the competition posed by CLECs is token at best. It's going to be a long, hard summer, winter, spring....
Horkus 12/4/2012 | 10:14:59 PM
re: XO Finally Files for Bankruptcy If you look at the RBOCs coverage map they all overlap except for bellsouth. Verizon/SBC/ Qwest are everywhere.
What are they doing so far from home.
They have to assume a CLEC status in these cities which in turn fosters competition and they make their new ventures based on profits not debt.
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