XO changes plan, raises cash

(Telephony) XO Communications has scaled back its business plan and raised $250 million in private equity, which the company believes will be enough to last until the beginning of 2003.

Many of the changes to XO’s business plan revolve around agreements with Level 3 Communications, the most significant being the cancellation of a November 2000 contract to purchase nine metropolitan fiber networks in Europe from Level 3 for $148 million. Those rings were to be used to provide facilities-based, high-bandwidth data services to multi-location business customers, ISPs and other telecommunications carriers.

The contract cancellation marks the end of XO’s planned European expansion, leaving the company with a dial-up ISP business it acquired though the Concentric merger as its only European presence.

In addition, XO is slowing its plans in North America by delaying the lighting of its intercity network purchased from Level 3.

The company now will become a North American broadband transport customer of Level 3, initially purchasing $30 million in wavelength services. XO will give Level 3 some of its transmission equipment to pay for a portion of that transport.

Buying broadband transport and transferring equipment to Level 3 reflect another significant decision by XO: the company has chosen to cut its capital expenditures by $2 billion during the next five years. XO Chairman and CEO Dan Akerson said the company will focus on penetrating its current markets rather than market expansion.

These and other measures are expected to reduce XO’s funding gap to about $1 billion.

That number is reduced even further with the announcement that XO raised $250 million in private equity from Forstmann Little & Co. Under the terms of the equity agreement, XO will issue 50 million shares of common stock to Forstmann Little and will reduce the share-conversion price of the preferred stock held by the investor from $31.625 to $17 per share. Expected to close by the end of the quarter, the transaction raises Forstmann Little’s stake in XO to 22.4%.

All told, XO still has a funding gap of about $750 million.

“We are working diligently in an effort to completely eliminate the gap by way of additional private investment, strategic asset sales or other avenues,” said Akerson.

Today’s announcements came in tandem with the company’s quarterly conference call.

For the first quarter of 2001, XO posted revenues of $227.3 million and a loss per share of $1.31 on a net loss of $443.5 million. Consensus analyst estimates taken from First Call/Thompson Financial projected a loss per share of $1.35.

Total voice revenues for the first quarter increase 16% from the fourth quarter to $131.1 million, and data revenues grew from $137.8 million to $142.2 million.

With the new business plan, XO revised its guidance of the remainder of the year.

XO now expects revenue for 2001 to be between $1.275 billion and $1.3 billion and an EBITDA loss of between $205 million and $235 million. Revenues for 2002 are expected to be about $2 billion.

In early-afternoon trading, XO’s shares increased 9% to $4.91.