XO Kills Deal With TelMex, Forstmann

Bankrupt broadband carrier XO Communications will scuttle an investment agreement with Telefonos de Mexico (TelMex) and Forstmann Little & Co. to avoid any potential lawsuits related to the deal.

by Roy Mark of www.internetnews.com [October 15, 2002]

Telefonos de Mexico (TelMex) and Forstmann Little & Co. will each pay XO $12.5 million and agree to release any claims they may have relating to the investment agreement. The pact requires court approval.

Reston, Va.-based XO also said it will implement the stand-alone plan contained in its plan of reorganization filed with the bankruptcy court. It calls for the conversion of the $1 billion in loans under the secured credit facility into common equity and $500 million of pay-in-kind junior secured debt.

According to XO, the settlement has the support of all parties to the investment agreement; the entities controlled by investor Carl C. Icahn, which hold more than 85 percent of XO's senior secured debt and over $1.33 billion face amount of XO's senior notes; the indenture trustee for XO's subordinated notes; and the plaintiffs in shareholder legal actions. XO has scheduled a hearing for bankruptcy court approval of the settlement for mid-November.

In June, XO filed for Chapter 11 bankruptcy protection, ending months of speculation and sometimes contentious dealings with Icahn, who was opposed to the Fortsmann Little/TelMex deal that called for the companies to invest $400 million each in exchange for an 88 percent equity position in XO.

The remaining equity, other than that allocated to the company's employees, would be held primarily by holders of the company's senior notes. Consequently, current holders of the company's equity securities were expected to lose substantially all of the value of their investment as a result of the restructuring.

XO had trouble selling that deal to stockholders. Even Forstmann Little and TelMex expressed concerns about XO meeting certain conditions of the deal and asked XO to consider terminating the agreement.

XO will seek the regulatory approvals required to complete the stand-alone plan. The company said that the receipt of these regulatory approvals and the confirmation of the stand-alone plan by the bankruptcy court are two of the most significant steps that XO must accomplish before the restructuring can be completed and XO can emerge from bankruptcy.

The company's operating subsidiaries continue to provide service to more than 100,000 business customers and to add new customers. XO had cash and cash equivalents of more than $500 million as of September 30, 2002.

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