CEO: XO spin-off boosts wireless, CLEC business

The breakup of XO Communications stands to benefit both its CLEC business and the wireless assets the company is now spinning off into a separate entity, XO CEO Carl Grivner said this morning in a telephone interview.

“I would say our wireless assets have been undervalued--this breaks those off into their own entity,” he said. At the same time, XO will now be debt-free and in position to consider further expansion as the CLEC industry continues to consolidate, Grivner said.

XO announced last Friday that it was selling its wireline competitive carrier business to a subsidiary of investor Carl Icahn for $700 million and would use that money to pay off debt and to fund operations of a wireless carrier, to be named later, that will focus on the service provider market, both in backhaul and last-mile access. The new company will take advantage of the spectrum XO owns in the 28 GHz to 31 GHz LMDS band.

Of particular interest is the backhaul market, which is expected to boom as wireless service providers build broadband data capabilities into their access networks and look for more cost-effective ways of backhauling that traffic than leasing T-1 lines from incumbents.

“The LMDS spectrum is really suited better for backhaul capabilities,” Grivner said. “It does have last-mile possibilities, and we have trialed that technology with commercial customers successfully in San Diego and Orange County. I believe [backhaul] will be a significant part of our business. But we are starting from almost nothing in terms of revenue. We expect it to grow, especially as alternatives to the ILEC become fewer. Also, as the mergers actually start to happen, wireless is going to take on a whole new life. This is not a new technology--it has been very successful in Europe and in Asia.”

XO has also been trialing WiMAX technologies, which the new company will use to provide last-mile access, but Grivner said those are not as technologically mature.

Grivner declined to announce his future plans and to name an executive team for the new company, saying that information will be made public later.

The transaction follows what the company describes as an intensive process by a special committee to consider XO’s options for the future, and review multiple bids for the wireline business. Elk Associates LLC, owned by Icahn, was the winning bidder, but could still be outbid and settle for a 1% breakup fee. The proceeds from the sale will repay XO’s outstanding long-term debt and redeem its outstanding preferred stock, and leave $300 million in cash available to fund the operations of the new wireless entity.

The deal is expected to close in late 2005 or early 2006.