Falling knives anyone? Only five months ago, we thought the prospects for XO Communications looked good ("Don't Hang Up ," November 27). Though XO's shares had fallen to 16 from a March 2000 high of 66, the company, which is building a nationwide fiberoptic local and long-distance network, looked like a survivor in the telecom wars. Not the least of its virtues: a battle-tested management and the backing of billionaire telecom pioneer Craig McCaw.
The battle has turned bloodier than we expected, and in recent weeks, many investors and analysts have X'd XO off the survivor list, driving its shares to 3.30 at Friday's close.
Investors have grown restive about XO's $4.4 billion of debt and $2.1 billion of convertible securities, not to mention the $2.5 billion gap between its cash on hand and what it will need to complete its network.
These are not new issues, however. They were widely known late last year and highlighted in our story. But the importance of funding grew as the equity markets fell further into bear territory and emerging telecom companies fell by the way. Only last week, rival Winstar Communications filed for bankruptcy protection.
XO, however, is no Winstar. The company ended 2000 with $2.88 billion of cash and $625 million available on its bank lines. And in January, XO raised an additional $517.5 million in a convertible bond offering leaving it with enough liquidity to get through 2002's first half.
What's more, XO's managers have been through this drill before. CEO Dan Akerson was chief financial officer of MCI during the 1987 market crash and at the helm of wireless phone outfit Nextel Communications in 1998, when no one thought it stood a chance. Similarly, XO founder Craig McCaw successfully steered a debt-laden McCaw Cellular Communications through the tight debt and sagging stock market of the early 1990s.
So what's their plan? The company, which will report first-quarter earnings on Thursday, isn't talking. But chances are they'll also announce that they're slashing capital expenditures. Additionally, there's speculation that a new round of funding is in the works. Last week the New York Times reported that Forstmann Little, which has already invested $1.2 billion in XO, may pump several hundred million dollars more into the company. CEO Akerson, it should be noted, is a former Forstmann Little partner.
Mark Kastan, an equity analyst at Credit Suisse First Boston and a bull on the stock, worries that a reduction in spending would slow revenue growth. Under a cost-cutting scenario, he says he'd reduce his price target on the shares to 29 from 61.
Glenn Waldorf, an equity analyst at UBS Warburg, is less sanguine. Says he: "I don't believe it's the place for investors to put their money right now."
Our guess is that the company will steer its way through the current turmoil. As Akerson put it last November: "We track a list of 25 companies…probably less than four will survive. We think we are [a] survivor."
-- Jacqueline Doherty |
