XO Communications files for Chapter 11

Monday, June 17, 2002 | 11:29 a.m.

SUN STAFF AND WIRE REPORTS

XO Communications, the telecommunications service provider in Las Vegas and other markets, filed for Chapter 11 bankruptcy protection today and presented two reorganization plans that will probably raise questions among its creditors.

XO, based in Reston, Va., is pursuing a reorganization plan that tries to force financier Theodore J. Forstmann and Telefonos de Mexico to stand by an agreement they made in January to invest $800 million collectively in the company, XO executives said. In recent statements, Forstmann and Telmex have said that they have the right to end the deal.

XO had long been expected to file for bankruptcy.

Joe Brondon, general manager of XO Nevada, said the company has been "communicating with ( Las Vegas) customers for a while that this would happen."

Brondon said Las Vegans who have phone service through XO will not see any changes in service or pricing structure resulting from the bankruptcy.

"If you look at the filing itself, this is a filing by the parent corporation," Brondon said. "They're going through the restructuring process. From a local branch or subsidiary perspective, this will have absolutely no impact on us in terms of the way we service our customers, how we build our network infrastructure or how we deal with vendors in our day-to-day operations."

Brondon said the company has lost about nine local workers in the last six months through restructuring efficiencies at its Las Vegas operations. He said no layoffs are planned among the company's current 80 employees.

Brondon declined for competitive reasons to disclose the number of customers XO has in Las Vegas. The company provides data and telephone services for Las Vegas-area businesses, and long-distance phone service for Las Vegas residents.

"Las Vegas is one of the more successful branches for XO Communications," Brondon said. "Not only have we been EBITDA (earnings before interest, taxes, depreciation and amortization) positive for two years, but on a month-to-month basis we crossed over to positive cash flow in the third quarter. We're going to continue with business as usual."

XO filed an alternative reorganization plan, a backup in the event that the deal with Forstmann and Telmex proves unenforceable.

The alternative plan calls for loans to be converted into stock.

XO's options were limited several weeks ago when financier Carl C. Icahn rescinded a restructuring proposal because he could not reach an agreement with XO's creditors. Some analysts had questioned whether Icahn's proposal was simply a strategy to force Forstmann and Telmex to raise their offer.

Instead of raising their offer, Forstmann and Telmex told XO last week that they planned to abandon the deal entirely, citing provisions in the agreement that allow them to back out if certain conditions are not met. They argued that they were allowed to walk away if, among other things, XO's business materially changed, if they were uncomfortable with unresolved litigation or if the bankruptcy plan was unacceptable.

Forstmann's leveraged buyout firm, Forstmann Little, has already invested $1.5 billion in XO and had been a supporter of Dan Akerson, XO's chairman and chief executive. But in a December memorandum to his investors, Forstmann acknowledged that, "Obviously, with the benefit of hindsight, we clearly invested in XO too early and at too high a price."

Forstmann's plan to recapitalize the company was intended to protect his earlier investment, though many Wall Street analysts questioned the investment. He told his investors, "By eliminating all this excessive debt and getting to an appropriate capital structure, we believe that the value of this company can be improved to the point that will at least allow us to get even on our total investment."

XO, founded by the mobile-phone pioneer Craig O. McCaw, piled up more than $5.1 billion in debt building a telecommunications network in the 1990s. As a result, Akerson has said, the debt payments have simply overwhelmed the company's income. He said he thinks the company's debt problems, not operational problems, are to blame for the company's predicament.