XO gets cash infusion from Telmex, Forstmann Little

XO Communications today announced an ambitious restructuring plan designed to eliminate most of the company’s $5 billion worth of debt but making its stock practically worthless in the process.

Mexican incumbent telco Telmex and investment firm Forstmann Little each pledged $400 million in cash for 39% stakes in the company, contingent on XO dropping its debt from $5 billion to $1 billion.

Though stingy with the details, XO is offering an equity and cash package to its bondholders while creating millions of new shares. XO warned its common stockholders that if the deal goes through their stock will be diluted of most of its value. XO currently has $1 billion in cash, but the carrier didn’t reveal whether it will use all or part of that sum to create the bondholder package.

“I’m extremely disappointed in the lack of clarity XO is providing about this deal,” said Ken Kotylo, a financial analyst with William Blair & Co. “They are implying they are going to take out $4 billion in debt, but they aren’t saying how.”

Forstmann Little has a previous history with XO, having invested $1.5 billion in the carrier over the last two years. XO’s CEO Dan Akerson is also a former partner at the investment firm, which recently expanded its investment strategy into the telecom space.