In 1969, Craig O. McCaw, then a 19-year-old sophomore at Stanford University, found his father, J. Elroy McCaw, dead of a stroke in the family's Seattle mansion, the Highlands. Only after Elroy's death did Craig and the rest of the McCaw family discover that the radio and television tycoon had piled up a mountain of debt. Creditors quickly demanded repayment. The McCaws were forced to auction off many prized possessions, including the Highlands itself.
McCaw went on to make his own fortune, selling his wireless company, McCaw Cellular Communications, to AT&T (T) for $12 billion in 1994. Now, however, McCaw is facing debt troubles eerily similar to his father's. XO Communications (XOXO), which McCaw founded in 1994, borrowed billions over the past few years to build a state-of-the-art telecom network. But the Reston (Va.) company never made a dime in profits, and when the capital markets closed up last year, XO began running short of cash.
In December, the company stopped making interest payments on its debt and tried to negotiate with creditors to restructure its $7 billion in liabilities. BusinessWeek has learned that XO expects to file for Chapter 11 bankruptcy protection within the next two weeks in order to push debtholders to agree to a proposed restructuring. "It could happen in days -- it could be two weeks," says one source close to XO.
FALLING FORTUNE. A restructuring out of bankruptcy is still a remote possibility, but any deal will be brutal for existing shareholders, notably McCaw. Under the terms proposed by XO, buyout firm Forstmann Little and Teléfonos de México will invest $400 million each in XO in exchange for 80% of the company's equity. XO's management, led by Chief Executive Daniel F. Akerson, will get 2%, and debtholders will receive the remaining 18% of the equity. McCaw, whose 19.8% stake was worth about $5 billion in 2000, will be left with nothing. He declined to comment for this story.
In the wake of the Enron scandal and accusations of wrongdoing at telecom player Global Crossing, XO's bankruptcy is sure to draw intense scrutiny. There are no allegations of accounting irregularities at this point. XO appears to have avoided the revenue-booking practices that a whistle-blower at Global Crossing has said that company used to inflate sales. However, McCaw may draw criticism for selling XO stock while it was soaring, a move similar to that of Global Crossing Chairman Gary Winnick. McCaw sold $117 million in stock in 2000, according to Thomson Financial/First Call.
Already, investors have filed at least 14 class actions against the company and McCaw. The central allegation is that XO's management repeatedly told investors it could survive the difficult environment. On Apr. 4, Akerson said: "We believe that we have both the existing cash and future funding flexibility to weather the carnage that the telecommunications industry is now experiencing." Then on Apr. 26, when XO raised $250 million from Forstmann Little & Co., Akerson said the company had enough cash "to fund XO well into the first half of 2003."
TROUBLES EVERYWHERE. That's why investors were shocked at the proposed restructuring. "People think these guys just flat-out lied," says Steven J. Toll, a partner at Cohen, Milstein, Hausfeld & Toll who was named lead counsel for the class actions on Feb. 15. Akerson would not comment because of the restructuring negotiations.
After reorganization, XO may become a viable telecommunications competitor. The company has built networks in 63 metropolitan markets to offer communications services to small and midsize businesses, and it bought a nationwide fiber network. Also, company executives have shown they can swipe business from larger rivals. In 2001, revenues surged 74%, to $1.3 billion. "They have proven themselves operationally, even if you can't say the same thing financially," says Tim McElgunn, a senior analyst at market researcher Stratecast Partners.
His setbacks on XO are only a few of the recent troubles plaguing McCaw. The stake he holds with his family in wireless player Nextel Communications (NXTL) has tumbled in value from $8 billion in 2000 to less than $400 million now. In addition, McCaw has had to scale back his grand plans for launching new satellite services for voice and data communications because of the tight capital markets. Once a recognized visionary, McCaw is now suffering some of the same missteps as his father. By Peter Elstrom in New York