Friday, November 30, 2001

Debt-heavy XO Communications Inc. will trade 78 percent of the Reston telecommunications company in return for $800 million from two investors.
The massive investment outlined yesterday is part of an elaborate plan to wipe away the bulk of the company’s enormous debt and avoid seemingly imminent bankruptcy.
“They got out over their skis a little too much. You knew a restructuring was coming, but it was impossible to predict how it would look,” said Peter DeCaprio, analyst at San Francisco investment banker Thomas Weisel Partners.
New York investment firm Forstmann Little & Co. and Mexican telecommunications company Telefonos de Mexico SA will invest a combined $800 million in XO. Each will receive 39 percent of new shares to be issued. Forstmann Little already has invested $1.5 billion in XO, which markets local and long-distance phone service, Internet access and other telecommunications services in 63 U.S. markets.
The deal effectively wipes away the investment current shareholders have in the company’s estimated 430 million shares of common stock. That includes Craig O. McCaw, the wealthy wireless telephone pioneer who helped start XO in 1994. He owns 19 percent of XO.
“Current shareholders are going to be left with virtually worthless stock. The severity of this restructuring is a surprise to a lot of people,” said Thomas Morabito, analyst with Cleveland investment banker McDonald Investments.
XO made the deal with Forstmann Little and Telefonos de Mexico because it was sinking under the weight of interest payments from debt. After announcing the deal, XO said it canceled future interest payments on its debt.
XO has $5.1 billion in debt through high-yield bonds and $1.8 billion through preferred stock. There was little chance XO would survive without a restructuring plan, analysts said.
“The debt caught up with them,” Mr. Morabito said.
XO intends to emerge with no more than $1 billion in long-term debt. Bondholders and regulators must approve the deal.
XO Chairman and Chief Executive Dan Akerson, who joined the 7-year-old company in 1999, said negotiations with lenders to restructure debt will begin shortly. Then the company will ask bondholders to retire debt in return for cash and equity, said Mr. Akerson, a former employee of Forstmann Little & Co.
Bondholders may not get more than 6 cents for each dollar they are owed, said Ken Kotylo, analyst at Chicago investment banker William Blair & Co.
“It seems to me that at 6 cents on the dollar, bondholders do not have a lot of incentive to approve this. But they also realize they are not going to get 100 cents on the dollar,” Mr. Kotylo said.
XO shares fell 8 cents, or 7 percent, to $1.03 a share on Nasdaq yesterday before trading was halted. The stock reached a high last year of $66 a share.
While the terms of the deal surprised Wall Street, analysts were united in their belief that the investment and restructuring plan will pull XO away from severe fiscal problems.
“If this gets done, they will be a normal company. I think they are going to be in really good shape,” Mr. DeCaprio said.
XO has not failed to generate revenue. The company reported second-quarter revenue for the period ending June 30 of $306.8 million to meet Wall Street’s expectations. XO reported third-quarter revenue of $331.4 million, but had a loss of $398.9 million for the quarter ending Sept. 30.
But debt payments have helped contribute to a loss of $1.3 billion through the first nine months of the year. That cash shortage forced XO to scrap a $2 billion European expansion plan earlier this year.

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