A ray of hope illuminated the increasingly dark local multipoint distribution service sector last week when XO Communications Inc. announced in conjunction with its first-quarter financial results that it secured $250 million in much-needed funding, but the broadband provider also said it will be dramatically changing how and why it spends money during the next five years.
Forstmann Little & Co. agreed to invest an additional $250 million in XO, and XO will issue 50 million shares of common stock and amend the terms of the preferred stock held by Forstmann Little to reduce the share conversion price from $31.63 to $17 per share. This will give Forstmann Little 22.4-percent ownership of the company, rather than 12 percent.
Theodore Forstmann, senior partner at Forstmann Little, said XO has met all its operational and financial targets since it first invested $850 million in XO in January 1999. XO was known as Nextlink Communications Inc. at that time. Forstmann Little has poured approximately $1.25 billion into XO since then, not including the $250 million it offered up last week.
Forstmann Little’s confidence comes in part from XO’s aggressive new plan to decrease its funding gap, which XO says now hovers around $1 billion. The five-year plan includes reducing capital expenditures by $2 billion by halting its European expansion altogether, delaying the activation of its North American inter-city network, restructuring two previously announced agreements with Level 3 Communications Inc. and slowing the number of planned expansions in its existing U.S. metro fiber networks. The company is raising rates and will no longer be waiving installation fees as well.
Forstmann Little also used to employ Dan Akerson, XO’s chairman and chief executive officer, giving XO a personal inroad to the investment firm’s cash. Akerson served as a general partner with the firm from 1993 to 1996, at which time he joined Nextel Communications Inc.
XO will launch just two new markets this year on its fiber network-Minneapolis and Cincinnati-and will not launch service in any more LMDS markets. XO offers fixed-wireless service in 27 markets nationwide, although Akerson said probably 95 percent of the company’s traffic is carried over local fiber.
The funding from Forstmann Little should sustain XO for a few years, and get it through the rest of this year, which so far has seen 38 GHz operator Advanced Radio Telecom Corp. go out of business and 28 GHz operator Winstar Communications Inc. file for Chapter 11 bankruptcy protection. XO also uses the 28 GHz frequency band.
“We’re in this for the long haul,” said Akerson, during the company’s quarterly earnings call.
Akerson said the company expects to have enough capital to fund the company “well into 2003,” at which time he expects XO to reach positive cash flow if the new business plan proves successful.
“Because we have over two years of committed funding, we believe we have adequate time for market conditions to improve,” Akerson said, but he emphasized the company will be “cautiously optimistic” for the remainder of the year.
XO reported revenues for the first quarter ended March 31 of $277.3 million, a 10-percent increase from fourth-quarter 2000 and a 162-percent increase from revenues reported for the same time last year. Earnings before loss, interest, taxes, depreciation and amortization totaled $77.1 million, or $1.31 per share, compared with a loss of $63.1 million for first quarter 2000.
XO predicted it would earn $1.28 billion to $1.3 billion in revenues for 2001, and take a loss of $205 million to $235 million.
Prudential Securities downgraded shares of XO from “hold” to “strong buy” April 9 in conjunction with an industrywide downgrade, and lowered XO’s 12-month share target price from $32 to $5. UBS Warburg cut its price target from $9 to $7 last Friday, warning investors to look at XO’s senior debt offerings for higher potential.
Shares of XO were trading at $3.78 at RCR Wireless News press time, down 54 cents from the previous day’s close.
