New Letter: R2 to XO BOD Knauss and Gradin
sec.gov
Dear Messrs. Knauss and Gradin:
As you know, R2 Investments, LDC is the beneficial owner of more than 15 million shares of XO Holdings, Inc.'s common stock, and has sent each of you numerous letters asking the "independent" directors to protect minority shareholders' rights. We commend you for standing up to Carl Icahn's previous attempt to make away with the company for $0.80 per share late last year, but your inaction in refinancing the company's upcoming maturities has again put the company in a precarious position.
It is noteworthy that Mr. Dell, one of the three "independent" directors, recently resigned from the board. We can only speculate that either he was tired of being asked to rubber stamp decisions he was uncomfortable with or we can take his stated reasons for resigning from the board at face value. Either way, it is atypical for a director to resign mid-term, but this may create the perfect opportunity to bring a new director onto the board who would stand up for minority shareholder rights.
In any event, the board has allowed the company again to put itself in a precarious position as approximately $217.4 million of Class A preferred stock held by entities affiliated with Mr. Icahn matures on April 15, 2010. As we mentioned in our previous letters, your inaction in the face of the need to fix the company's capital structure is shameful. You not only passed up numerous opportunities to refinance the company's debt from 2004 to 2008, but your latest Form 10-K states that you continue to believe that your financing alternatives "should not include an issuance of high yield debt." Numerous other companies in your industry, like Qwest Communications, PaeTec Holding, Level 3, and ITC DeltaCom, have seen this as the ideal time to raise high yield debt. Your refusal to do so will once again ensure that Mr. Icahn has the company "over a barrel" to extract concessions.
You previously allowed Mr. Icahn to complete a transaction that gives him at least 80% ownership, and consequently allows him to exploit the company's valuable NOLs. (We have challenged this transaction in ongoing litigation directed at undoing this self-dealing transaction.) We are now concerned that he may use this current opportunity to reach the coveted 90% ownership threshold required to complete a short-form merger.
Mr. Icahn will likely try to convince the board that it is in the company's best interest to allow him to convert his $217.4MM of Class A preferred stock into equity or an equity-linked security. Not only does the company have ample liquidity to completely cash out the Class A preferred stock, but the company could also easily raise enough debt to completely cash this stock out given its recent improvement in operating trends and the strength of the debt capital markets. We believe it would be a tragedy for minority shareholders if the board were to let Mr. Icahn exchange his Class A preferred shares into anything with an equity component. If he is able to surpass 90%, the minority shareholders will be subject to possibly being merged out of existence, and Mr. Icahn will have succeeded in destroying minority shareholder value while being the sole beneficiary of that destruction.
Rest assured, we are going to do everything in our power to ensure that justice is served and that the rights of minority shareholders are protected. Should Mr. Icahn succeed in pressuring you to hand over the company to him through what we view as this back door method, we would pursue all legal remedies available to us, including holding each of you personally liable to the maximum extent permitted by law, for this latest infraction in trampling the rights of minority shareholders. Please stand up and do the right thing! |
