XO can close on Forstmann

Copyright 2002 The Deal L.L.C.
The Daily Deal...08/27/2002
From LexisNexis

Johnathan Berke
From The August 27, 2002 Edition Of CED Broadband Direct

Bankrupt XO Communications Inc. will have three weeks to close the $800 million buyout offer made by a reluctant Forstmann Little & Co.-led investment group or else face the possibility of Carl Icahn controlling the broadband company.

Judge Arthur Gonzalez of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan confirmed XO's plan Monday, Aug. 26, after a two-hour hearing. Reston, Va.-based XO has until Sept. 15 to complete all the conditions in the Forstmann deal, though the deadline could be extended under certain circumstances.

If the deal doesn't close, XO would then pursue a plan in which its bank group would gain a majority stake in the company.

If that happens, Icahn would be XO's controlling shareholder, since he has purchased a majority of the company's bank debt.

Is such a scenario possible?

Considering that the Forstmann group has wanted out of its offer for the past three months, it wouldn't be a surprise if the $800 million deal fell through.

Still, XO and its advisers have said repeatedly that they can close the offer by the deadline. Also, the Forstmann group had a material adverse conditions clause in the January deal it cut with XO before the company went bankrupt, yet it hasn't invoked it or taken the matter to court.

A Forstmann spokesman had no comment, while XO could not be reached for comment.

In that January agreement, Forstmann and Telefonos de Mexico SA de CV committed $400 million each toward buying a majority stake in XO.

Just before XO's filing for bankruptcy, however, Forstmann's legal counsel sent XO a letter June 6 stating that it didn't think the company could satisfy all the conditions of the deal.

Among Forstmann's concerns was the decline in the broadband sector, which has led to scores of bankruptcies besides XO's. In fact, bankruptcy auctions for broadband assets have deteriorated into fire sales. The most noteworthy include e.spire Communications Inc. being sold to private equity-backed Xspedius Management Corp. for $68 million in June and Winstar Communications Corp., which was sold to the Newark, N.J.-based IDT Corp. for $42.5 million in December 2001.

XO believes it can avoid such a fate since its fiber networks are concentrated in major urban markets.

"We have local fiber networks that compete with the Baby Bells," an XO press official said.

"There are not a lot of people in the sector who have that."

XO's unsecured creditors also believe the company can close the deal.

"The unsecured creditors fully support XO's efforts to close the Forstmann deal," said one of the unsecured's lawyers, David Botter of Akin Gump Strauss Hauer & Feld LLP.

Icahn could not be reached for comment. But if the Forstmann plan is completed, XO's bank debt will be rolled over to the post-bankruptcy entity. He will share in the $200 million cash and 20 percent equity stake that unsecureds would get in XO, since he also holds unsecured debt.