Is Carl Icahn Stealing XO? (XOHO, IEP)

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XO Holdings, Inc. (OTCBB: XOHO) is not a usual company we’d cover because of the size and because of the Bulletin Board status.  But this week we have been getting multiple inquiries about this stock.  Usually on OTC stocks about all we see are stocks being touted, but that is not the case here.  Carl Icahn is involved in this company as majority holder, and he’s trying to buy the rest of the company that he does not own for $0.55 per share.  This is the old XO Communications, the competitive local exchange carrier or CLEC, although that term slowly disappeared over the last decade.

Icahn is of course the Chairman of Icahn Enterprises, L.P. (NYSE: IEP) and has been influential in many mergers.  This time he is the buyer rather than a holder trying to command a higher price.  It might have been easy for the world to forget about XO, but the company has held its ground in an almost forgotten sub-sector of the telecom sector.  After taking a look through the books, it turns out that its business is still generating more than $1.4 billion in annual revenue.  But that is not profitable for common holders.

The recent buyout offer from Icahn was essentially a double compared to where its stock had been.  The problem is that Icahn Associates Corp. already held a stake of roughly 52.7% in XO as of June 30. The deal is also apparently not subject to financing nor to due diligence.  We have a 52-week range of $0.08 to $0.79.  With a mere $92 million market cap, it turns out that the company listed about $391 million as its cash and short-term securities and listed $408 million as its total liabilities.  The issue here is that there is a redeemable preferred stock listed as $1.05 billion on its books, and that makes a traditional balance sheet review including the $725.77 million a bit tricky.

This is definitely not the traditional Carl Icahn stock.  And there is also a dissident group of shareholders who feel that Icahn’s bid will steal the company.  One holder noted a higher bid in the past and one noted a $3 or $4 handle as far as what the stock should sell for.  Unfortunately, this is one of those issues that wanting more and feeling the company is worth more might not matter in the end.  When companies are majority-owned by a single party, the rest of the owners and stakeholders have a very tough time being heard.  They have an even tougher time being able to influence outcomes.

Before 2008, this stock spent most of the time between $2.00 and $4.00.  It did also trade higher than that.  But the last 18 months have also been very painful as you can tell by the 52-week trading range.  Because this is Bulletin Board listed and because the market cap of the common stock is so small, it seems that XO is not getting the same attention that other acquisitions get.

Because of these issues, Carl Icahn might get to have his way here…. even if it is at the expense of minority stakeholders.  It is always possible that Icahn will have to pay more.  He has been a minority holder in other companies and been able to demand a higher price than what a company was getting.  Maybe he will let the same happen here for the minority stakeholders.  Maybe.

JON C. OGG
JULY 31, 2009

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