XO Holdings and Elk Associates have mutually agreed to terminate Elk's proposed purchase of the former's wireline business, citing excessive distractions caused by shareholder lawsuits meant to block the sale.

XO had agreed last November to sell its wireline competitive local exchange carrier (CLEC) business to Elk Associates, an entity created by XO's chairman and majority investor, Carl Icahn.

XO planned to use the proceeds from the proposed $700 million sale to pay down most of its $301 million in long-term debt and to fund the operations of the newly independent wireless business, which was to have been renamed.

But shareholders filed three separate lawsuits to block the deal, claiming that the sale price was too low and that the company didn't do enough to seek competing bids.

An XO spokesperson denied that the bidding process for its CLEC business was anything but open. About 40 entities privately reviewed the assets for sale, he said.

A clause in the deal between XO and Elk allowed either party to back out of the sale if it had not closed by July 3, 2006. On March 27, Elk told XO's board that delays caused by the shareholder lawsuits made it unlikely the sale would close by July 3. (A court hearing to consider the lawsuit had been scheduled for May, for example.) Hoping to end the distraction and legal costs created by the shareholder lawsuits, the two agreed to mutually terminate the deal without break-up fees or litigation.

"You can't operate the businesses like this, with the delays going on," the spokesman said.

XO will continue operating the wireless and wireline businesses as separate units.

As for the $301 million in outstanding debt that the company hoped to reduce with proceeds from the sale, the spokesperson said XO has a waiver that prevents its lenders (which are owned mostly by Icahn) from accelerating that debt into short-term debt until March 2007.

"When we get to that point, we'll get to that point," the spokesman said.

In the company's annual report to regulators filed earlier this month, XO wrote, "If we are not able to close the wireline sale, we will be required to re-evaluate our strategic direction, including exploring options to refinance our senior secured debt."