XO Communications Inc. (OTC BB: XOCM.OB) has seen off Qwest Communications International Inc. (NYSE: Q) in the head-to-head battle to buy bankrupt carrier Allegiance Telecom Inc.

After a titanic struggle, XO triumphed with a cash and stock deal worth nearly $656 million at XO's early morning share price of $7.60.

The auction, which started early yesterday afternoon, went on until about 5 a.m. EST this morning, and the winner is naturally pleased with the result. "It's ecstatic over here," says XO spokesman Chad Couser.

As reported earlier in the week, XO's need and desire for the bankrupt carrier's network and customers was greater than its rival's (see XO's Quest for Allegiance).

The deal will provide greater value for Allegiance's creditors than a previous arrangement with Qwest, which struck a deal last December worth $390 million to buy the struggling CLEC. XO will pay $311 million in cash plus about 45.38 million shares of XO common stock, which at this morning's price of $7.60 would be worth $344.9 million. That values the entire deal at $655.9 million.

However, a source close to the deal says further financial details, including a set value of XO stock, will be revealed next week. In addition, the source says the deal will involve XO taking on some liabilities that will ultimately value the deal at around $900 million, though some details have yet to be finalized. Significant job losses are also likely, adds the source, as there is considerable overlap between the assets of the two companies; and it's unknown whether Allegiance senior management will join XO.

What is certain, however, is that the new entity creates a significant infrastructure-based national service provider, combining two of the two largest national competitive local exchange carriers (CLECs).

The deal involves the majority of Allegiance and its subsidiaries, though the CLEC's customer premises equipment sales and maintenance business, known as Shared Technologies, and its managed modem business, plus certain other unspecified assets and operations, are not included.

Allegiance will try to sell these additional assets separately, says a company spokesman, though their ultimate fate will be decided by the bondholders that stand to gain from any money raised. The spokesman adds that Allegiance does not expect any regulatory intervention regarding the deal with XO.

— Ray Le Maistre, International Editor, Boardwatch