XO Goes to the Bargain Bin

Add XO Communications to the list of distressed properties bought on the cheap by Forstmann Little and Mexicos leading financier, Carlos Slim Helu.

XO announced today that Forstmann Little and Telmex, Mexicos largest phone company, will each invest $400 million in the struggling CLEC. In return, the two new investors will each get a 39% stake in XO. Slim holds a controlling interest in Telmex and is chairman of that company.

The deal essentially renders XOs current common shares worthless, according to a press release issued by the company. At 2 p.m. Eastern time, shares of XO were trading at 80 cents, down 22% for the day. The companys share price hit its all time high of just over $65 in early 2000, and XO shares traded as high as $30 a share in Feb. 2001.

Right now, XOs principal shareholder is Craig McCaw, who founded the company (then known as Nextlink Communications) after selling his wireless empire to AT&T in 1994. McCaw has been divesting some personal property in recent months, including a 300-foot yacht that he sold to fellow billionaire Paul Allen for $100 million.

Forstmann Little already has sunk $1.5 billion into XO, in a series of investments that began in January 2000. In early June, Forstmann Little made a $250 million investment in XO, at which time it controlled 22% of the companys common stock.

The New York-based investment company also holds a 20% stake in McLeod Communications, another CLEC that is struggling under the weight of massive debt. In August, Forstmann Little invested another $100 million in McLeod, bringing its investment total in that company to $1.1 billion. At that time, Ted Forstmann, Forstmann Littles senior partner, was named board chairman of McLeod.

One of McLeods business partners is Prodigy, the Internet-service provider bought last month by SBC Communications from a group of investors including Carlos Slim.

According to XO, the preliminary agreements with Forstmann Little and Telmex provide for the execution of a definitive agreement on or before Dec. 14. Completion of the deals is contingent on regulatory approvals and on XOs successfully completing a restructuring of its existing balance sheet.

If the deals are completed, the chances would increase that XO and McLeod would be merged to form a more formidable local competitor. McLeods main strengths are in providing local phone service to second- and third-tier markets, primarily in the Midwest and Western United States. XO has rolled out local broadband service to 63 U.S. markets and operates an IP backbone connecting those markets.