Judge OKs XO Plan With Forstmann, Telmex

A federal bankruptcy judge approved a restructuring plan for XO Communications Inc. that requires an $800-million investment from two firms that had been trying to back out of the deal.

Investment firm Forstmann Little and the Mexican telephone company Telmex had agreed last year to provide $400 million each to XO in a bankruptcy reorganization in return for an 80% stake in the reorganized company.

But Forstmann and Telmex later said they wanted out of the deal, believing that XO could not live up to its obligations. XO refused to release them from the deal.

At a hearing in New York, U.S. Bankruptcy Court Judge Arthur J. Gonzalez ordered the Forstmann deal to go forward.

Forstmann Little, which had already invested $1.5 billion in XO, controlled 34% of XO when the company filed for bankruptcy protection in June, according to court records.

If the Forstmann deal falls through, XO’s backup plan calls for restructuring $1 billion in loans and converting some of that debt into equity.