Forstmann, Telmex to Acquire XO

XO Communications Inc., a telecommunications company with more than $2 billion in losses in the last year, agreed Thursday to a takeover by Forstmann Little & Co. and Telefonos de Mexico to avoid bankruptcy.

The company’s shares fell 22% after it said the takeover by Theodore Forstmann’s leveraged-buyout firm, which had invested more than $1.2 billion in the company, and Telmex will wipe out the value of most shares. Forstmann and Mexico’s biggest phone company will invest $400 million each for 78% of new shares. The company has canceled interest and dividend payments on unsecured notes and preferred shares.

XO, based in Reston, Va., has been hurt by soaring debt, overcapacity and falling demand after borrowing to build a high-speed data network. Phone companies such as Winstar Communications Inc., Covad Communications Group Inc. and Teligent Inc. have sought Chapter 11 bankruptcy protection this year.

“This is essentially a bankruptcy,� said Thomas Morabito, a telecommunications analyst at McDonald Investments Inc. who dropped coverage of the company and doesn’t own the stock. “If you’re a shareholder, you’re left holding the bag. You’ve got nothing.�

Shares of XO dropped 23 cents to 80 cents until trading was halted before U.S. markets opened Thursday. They declined 8 cents to $1.03 on Nasdaq on Wednesday and have tumbled 94% this year.

Cellular phone pioneer Craig McCaw owns 19% of XO’s shares outstanding, XO spokesman Todd Wolfenbarger said. The statement didn’t elaborate on McCaw’s stake, and Wolfenbarger declined to comment.

“Craig is sort of getting cut back in his equity ownership� as Telmex and Forstmann each get 39% of the shares, said Donna Jaegers, an analyst at Invesco Funds Group Inc., which doesn’t own XO shares.

The new investments hinge on XO’s negotiating with lenders and holders of senior notes, a process that will erase the value of current equity, the company said.

Forstmann, who personally made $2.5 billion rescuing Gulfstream Aerospace Corp. to avoid a default in the 1990s, is boosting his bet on telecommunications companies amid a series of bankruptcies among start-ups.

Forstmann Little had committed $600 million to XO and McLeodUSA Inc., a phone company that operates in the Midwest, before Thursday. Forstmann spent $5.8million of his own money to buy 800,000 XO shares this year.

The XO investment gives Telmex some U.S. telecommunications assets at a cheap price, Bruce Stanforth, a debt analyst with BNP Paribas in New York, wrote in a research note.

With XO’s debt falling to about $1 billion from $5.1 billion under the terms of the transaction, Telmex is unlikely to commit more cash in the short term, he said. Expanding XO operations could be “a cash burden� for Telmex, Stanforth wrote. “This is something to monitor,� he said. Officials at Telmex didn’t return a phone call.