Case Study

XO Communications

Prof Ian Giddy

XO Communications Ends Forstmann Deal

Oct 15, 2002

RESTON, Va. (Reuters) - XO Communications Inc.on Monday said it has agreed to release buyout firm Forstmann Little & Co. and its partner from a deal to infuse $800 million into the troubled telecommunications provider.

Under the settlement, which is subject to bankruptcy court approval, Forstmann Little and Mexican telecommunications firm Telefonos de Mexico will each pay XO $12.5 million. Meanwhile, XO will release the two parties from any claims related to the original investment agreement.

The deal has the support of billionaire investor Carl Icahn, who currently controls about 85 percent of XO's senior secured debt.

XO intends to seek bankruptcy court approval for the deal in mid-November and will move forward with its stand-alone plan of reorganization filed with the court earlier this year. If approved, Icahn will own 80 percent to 90 percent of the equity in the reorganized company, industry sources said.

Forstmann, led by leveraged buyout veteran Ted Forstmann, helped put together the $800 million investment in January, but later sought to back out of the deal, saying the company failed to meet certain conditions contained in the agreement.

Reston, Virginia-based XO, which provides telephone and data services to businesses in 65 U.S. markets, filed for bankruptcy in June under the weight of $8.5 billion in debt as the discussions with Forstmann began to unravel.

XO was one of several telecommunications upstarts to file bankruptcy after borrowing billions of dollars in recent years to build new communication networks that failed to attract enough traffic and customers. Other bankruptcies include Global Crossing Ltd., WorldCom Inc., and Williams Communications. Under XO's stand-alone reorganization plan, the company has said $1 billion worth of bank debt would be converted into stock, and it would issue $250 million worth of new equity in a rights offering to bondholders. It also would issue $500 million in new junior secured debt.

XO, which said it had more than $500 million in cash and cash equivalents as of Sept. 30, said it provides service to more than 100,000 business customers. It said it continues to add new customers, as well as cut costs and improve its operations.

The company is also the subject of an investigation by the U.S. Securities and Exchange Commission, which is probing XO's sales practices and whether it properly paid taxes on sales of prepaid calling cards.

©2002 Reuters

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