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XO, Latest Telecom Casualty, Files for Chapter 11 Protection

Bankruptcy: Firm still hopes to complete an $800-million deal, but investors are skeptical.


Long-struggling XO Communications Inc., a debt-laden telephone and Internet service provider founded by mobile phone pioneer Craig McCaw, added its name to the carnage in the telecom industry Monday by putting itself in bankruptcy, where a judge will help sort out its future.

The Reston, Va., company, which financiers Carl Icahn and Theodore J. Forstmann briefly haggled over earlier this year, said it still will try to complete a pending $800-million deal made in January with Forstmann's company and Telefonos de Mexico.

But in a letter to XO lawyers nearly two weeks ago, Forstmann Little & Co. and Telmex said it is "virtually impossible" for XO to meet the obligations under the purchase agreement because the value of its assets has eroded substantially and it faces considerable financial hurdles as well as securities fraud lawsuits and other litigation.

"I think it's too late," said one insider involved in the restructuring effort. "The [Forstmann] plan will go nowhere and the company will eventually be liquidated."

XO believes it can meet the conditions and complete the deal before the offer expires Sept. 15, said spokeswoman Lisa Miles. And if it can't, the company said it will go with its back-up plan to raise $250 million, initially from existing shareholders, and remain a stand-alone operation.

In a market with too much fiber-optic cable and too little demand for high-speed services, XO will face a daunting task.

Numerous telecoms already have filed for bankruptcy, including Global Crossing Ltd., the fourth-largest financial collapse in the nation's history.

And their assets are being written down drastically as the worldwide glut of network capacity that cost billions to install is being sold for millions--essentially pennies on the dollar.

Among telecom failures, XO's assets of $8.7 billion make it the second-largest failure behind Global Crossing, which listed $22.4 billion in assets in its Jan. 28 petition. XO's Chapter 11 reorganization case lists debts of $8.5 billion.

The assets consist primarily of a fiber-optic network that operates in 65 cities in 22 states, including 25 of the largest 30 U.S. metropolitan areas. The debts include $5.1 billion in bonds, $1.8 billion in preferred stock and $1 billion in bank loans.

XO was expected to file for bankruptcy, but with a prepackaged reorganization plan that already had the approval of bank lenders, bondholders and other creditors.

XO has long been working on restructuring and acknowledged the possibility of filing a Chapter 11 petition to limit such liabilities as shareholder equity and loan and bond payments, analysts said. The Forstmann-Telmex deal, negotiated last fall and signed in January, would bring in $400 million from each investor.

It would pump $600 million into the company and give bondholders $200 million in cash and 18% of the stock.

Forstmann was an early investor, putting $1.5 billion into the firm--and writing it all off since.

But bondholders balked at the plan. Icahn, who had bought about $750 million worth of bonds when they were selling for about 20 cents on the dollar, offered to put $550 million into the company for a 55% stake. His offer came with majority approval from bondholders.

Bankers, though, insisted on a number of conditions that proved to be deal-breakers, such as putting the entire purchase price in a nonrefundable escrow account and leading the company to a profit in its first quarter after the restructuring. Icahn pulled out last month, and Miles said his offer remains off the table.

With XO now in bankruptcy without a prepackaged plan, Icahn still might be able to pick up some of the pieces down the road, analysts said.

The company, which has never been profitable, has lost more than $6.1 billion since it went public in the fall of 1997. That includes a $2.2-billion loss for the first three months this year on top of a $2-billion loss last year.

The red ink has flowed almost as much as sales have soared. The firm reported $1.3 billion in revenue last year, an eightfold increase over 1998 sales. Revenue for the first three months hit $333.4 million.

Some analysts, such as Simon Reeves of Pacific Crest Securities in Portland, Ore., believe XO has good networks and can compete with the Baby Bells such as SBC Communications Inc. for business customers in metropolitan areas.

But analysts note that competition is stiff. Some question whether XO has customers who will stay with it through the reorganization.

XO doesn't have much time or a lot of money. It went through $106.4 million of its cash in the first three months as it built out some of its networks, leaving it with $352.6 million in cash at the end of March.

A year earlier, it went through $247 million in the first three months to end up with $740 million in cash.

The firm has been cutting costs for much of the last year and will be reducing the amount of cash flowing out in capital expenditures from about $136 million in the first quarter to less than $50 million in the current period, Miles said.

"We clearly have enough cash to carry us well after the three to five months it should take us to restructure the company," she said.

Wall Street wasn't so sure. The stock, which hit $66 a share two years ago, lost about a penny to close at 3 cents a share in over-the-counter trading.

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