FINANCIAL ICONS AT ODDS OVER XO RESTRUCTURING

XO Communications looked like another Forstmann Little bailout until Carl Icahn stepped in. Now in a fight of financial heavyweights, leveraged buyout king Ted Forstmann is pitted against the corporate raider extraordinaire. Who will win is questionable, but the outcome probably won't be pleasant for XO.

If XO doesn't reach an agreement with bondholders before going into bankruptcy, it could spell disaster for the carrier. Instead of a carefully planned restructuring plan, a free-for-all in bankruptcy court could mean the dissolution of the carrier.

XO has not said when — or if — it plans to file for Chapter 11, but it has stopped making debt payments, making some form of bankruptcy inevitable. Meanwhile, Forstmann and Icahn have not hinted that negotiations have begun. And based on public statements, neither billionaire financier appears to be budging.

“I'm not surprised we're running into a fight over restructuring. Forstmann Little was being very aggressive with its deal,” said Ken Kotylo, telecom analyst for William Blair & Co. “Icahn's playing reverse hardball now, and no one can blame him. If I had $3.5 billion owed to me, I'd be looking for a better deal, too.”

Forstmann and Icahn each have a plan for a restructured XO. Forstmann envisions a debt-free carrier with $800 million in new cash and a 78% stake split between Forstmann Little and his partner, Telmex Chairman and President Carlos Slim Helu. The deal would leave current shareholders with nothing and divide the remaining stake among employees and bondholders. Forstmann unveiled his plan in late November and told bondholders to answer by Dec. 14 — a deadline that has since been extended.

That delay might have been what the bondholders were seeking. Icahn led a revolt last week, proposing a restructuring plan that would put all equity in the bondholders' hands, leaving nothing to current shareholders — most notably, Forstmann Little. XO said the proposal wasn't viable and rejected the plan, reiterating its support for Forstmann's plan. Forstmann Little, which has been quiet until now about its XO dealings, issued its own statement saying it would not retreat from bondholder pressure.

“Our proposal has the support of XO's bank group and is in the best interest of the company's customers and its 6000 employees,” Forstmann Little claimed in the statement. “We have negotiated in good faith with the bondholders for the past six weeks and have made our final offer, which we have no intention of increasing.”

If neither side back downs, XO could find itself in a rather nasty bankruptcy, looking more like the court brawling of Excite@Home's Chapter 11 than the pre-negotiated ease of Covad Communications' filing. Here, Forstmann holds the advantage, Kotylo said, because it will be difficult to convince a judge to liquidate a company when a viable restructuring plan is on the table.

“You know what distressed CLEC assets are going for these days,” Kotylo said. “Forstmann probably feels he has the only plan that will keep the company going, and he's going to use that to his advantage.”