Portugal Telecom follow up – SELL

In April, I invested ~1% of my portfolio into Portugal Telecom because I found the merger situation with Brazilian Telco OI very intersting.

In the last few days, the stock price dropped like a stone because they disclosed a 900 mn “investment” into the troubled Portuguese “Espirito Santo” Group

Reader benny_m post a very good comment on the old post, asking where to find in the balance sheet those 900 mn EUR.

Looking into the 2013 annual report and the Q1 2014 report, there are only 2 possibilites:

1. Cash and Cash equivalents
2. Short term financial investments

Those are the respective amounts:

Q1 2014 2013
Cash 1.276 1.659
ST investments 1.071 914

So theoretically, the could be within either category. However two important caveats from my side:

– if they would book this under Cash and Cash equivalents, this would be scandalous and reminds me very much about the Royal Imtech fraud
– in the annual report, the comment to short term investments reads as follows:

This caption consists of short-term financial applications which have terms and conditions previously agreed with financial institutions.

They disclose 750 mn of “debt securities” which are described as follows:

(i) This caption includes primarily debt securities issued by PT Finance and Portugal Telecom that had an average maturity of approximately 2 months and were settled in 2014 at nominal value plus accrued interest.

This makes no sense. “Issuing” a security means actually receiving money. They cannot own their own issued securities as those would have to be consolidated out. Also the second part of the sentence makes no sense at all. Those amounts were not “settled” as the total amount even increased in Q1 2014.

To add insult to injury, Portugal Telecom actually discloses “related party transactions” with Banco Espirito Santo (BES) on page 219 of its annual report as they are a significant shereholder, but there is no word of the loans to “Rioforte” another Espirito Santo group company.

Let’s look back at the “official” press release of PTC:

PT subscribed, through its former subsidiaries PT International Finance BV and PT Portugal SGPS, a total of Euro 897 million in commercial paper of Rioforte with an average annual remuneration of 3.6%. All treasury applications in commercial paper of Rioforte will mature on 15 and 17 July 2014 (Euro 847 million and Euro 50 million, respectively). Treasury operations are carried out in the context of analysis of various short-term investment options available in the market and taking into account the attractiveness of the remuneration offered and are monitored and approved by the Executive Committee.

Additionally, it is thus important to note that the subscription of commercial paper of Rioforte is based on the 14-year long adequate experience in treasury applications of Banco Espírito Santo (“BES”) and GES entities, in the context of the strategic partnership signed in April 2000 between both parties. This strategic partnership contemplated the cross shareholding between both entities as well as the designation of PT as a preferred supplier of telecommunications to BES Group and the designation of BES as preferred provider of financial services to PT.

Both sentences are in my opinion a clear prove of dishonesty of PTC management. No, lending 900 mn EUR to a troubled financial institution IS NOT part of normal treasury operations. And second, if you have a “strategic partnership” then you shoul disclose this under the relvant section in your annual report instead ogf hiding it behind nonsensical comments.

I have actually send some simple questions to PTC IR (where did they book it etc.) but received no answer.


At this stage, I cannot say for sure if this is “only” dishonesty on part of PTCs management or if there is even fraudulent activity involved. In any case this looks really bad and as a result I will sell my PTC shares at current prices (2,18 EUR) and take the loss (~-27%. This is a company where you can’t trust management and even less their accounts/disclosures and this is an absolute “no go” for me.


  • Verfolgst du die noch? Inzwischen bei 88 Cent. Chart wie ein Pleitekandidat. Aber ihre Anleihen werfen nichts ab. 4,5% für die 10-jährige …

    Irgendwie wird jetzt ein Teil übernommen … Das hat die Aktie fast verdoppelt und jetzt wieder halbiert …

    • Ist mir ehrlich gesagt zu undurchsichtig. Nachdem der OI Chef gegangen ist blicke ich da nicht mehr durch.

      • Ich auch nicht.

        Aber: Kurs verdoppelt sich nach Angebot!

        Angebot wird durch 2. Bieter erhöht!

        Und jetzt auf ATL? …

        Was bleibt von PT noch übrig? Sie bekommen 7 Milliarden und behalten Schulden sowie das Afrika-Geschäft? Klingt wie ne Bad Bank.

        Ich würde ja gerne mal auf die IR-Seite. Aber die EN-Version streikt.

  • Willst dich nicht nochmal mit denen beschäftigen? KBV müsste jetzt in etwa genauso hoch sein wie vor den 900 mio “Verlust”. KGV und diverse andere Faktoren müssten ja jetzt deutlich besser sein.

  • Looks like the move may finally be starting. Spread widens 7% so far today.

  • Google translation of a Portuguese report about the negotiations:

    “The question is how this “loan” is paid. The report found near close to the negotiations that the main sources proposal to end the imbroglio that has become the “loan” and the solution to the merger between the telcos do not stop or delay-reduction is around 8% of the partners of Portugal Telecom (PT) in the “new Hi”.”

    Assuming that’s correct and that I’m extracting the meaning correctly PT would go from 38% to 30%. Bad deal for Oi, but nice outcome for the trade.

  • Remember 2B EUR in ESFG shares “back” the RioForte loan. Here’s what their bonds trade at today after some ESG entities could not make payments on its debt (http://www.bloomberg.com/news/2014-07-09/espirito-santo-bonds-tumble-to-records-amid-missed-note-payments.html):

    “Subordinated bonds of Espirito Santo Financial Group also declined. The company’s 351 million euros of 6.875 percent bonds fell more than 7 cents on the euro to 22 cents. The securities, which closed at 100.2 cents on June 18, ended last week at 49.39 cents.”

    I’m still betting that they either break off the merger or adjust the ratio. Short PT, long OIBR has one of the most asymmetrical return distributions I’ve ever seen. The trade can be leveraged since it has very limited downside.

    • #Joe,

      if the ymerger fails, both companies suffer in my opinion….


      • #mmi, I can’t envision a scenario in which PT will suffer less than OI given the circumstances. That’s all that’s required for the trade. I do wonder why the two still trade around parity. Either the market knows more than I or the arbs still have to clean out their inventory.

        This pair has been very inefficient with a spread of 13% at one point after the rights issue. So I wouldn’t be surprised if it just takes time.

      • Ich tippe im Fall eines 900 mio-Verlustes mal auf eine kurzfristige KE. 900 mio /1,50 Euro je Aktie würden 600 mio Aktien ergeben und aus 900 mio Aktien eben 1500 mio Aktien machen. Somit eine nette Verwässerung für eine Kapitalanlage zu 3,6%. Gewinn gabs schon vorher keinen großartigen und der muss jetzt noch durch deutlich mehr Aktien geteilt werden.

        Jedenfalls interessant. Wobei die Dimensionen krass sind. Wenn sie Cash für die Anleihen genommen hätten, dann würde das ja jetzt auch noch die NetDebt erhöhen, die eh schon bei 5 Milliarden sind.

        Der Kurs von PT und Espirito fällt immer weiter.

  • Hi mmi, I think this rational reacting to new facts even if these facts contradict your original thesis makes you a good investor. I will watch what happens next at PTC. What about the auditor? It is their job to check statements.

  • Hi Joe,

    I am not sure that PTC only invested in April. They said that they didn’t increase or extend anything after April, but the never said that they started to invest in April. Again, I posted this question to IR but no results.

    And thanks for the very entertaining Rioforte doc !!


  • The “investment” is 3 month commercial paper so it would not have shown on the Q1 balance sheet and would correctly belong into the cash and equivalents section on the balance sheet.

    Now that you have sold you’re probably no longer interested. But RioForte’s 2013 numbers make for a very entertaining read (http://www.rioforte.pt/empresas/ESCOM1/documentos/Rioforte%20Consolidated%20Financial%20Statements%202013.pdf). There you’ll see that they invested ~2B Euro at the end of 2013 mainly in ESFG stock, buying it from Espirito Santo related paries. ESFG now has a market cap of 300M EUR. The purchase was funded from money raised short term (e.g. PT).

    My read is this: RioForte as the non-financial arm of the ESG was the only one still good for money. So they issued a ton of short term paper and promptly forwarded the funds to the guys in trouble. What remains at RioForte is worthless ESFG stock and lots of current liabilities…

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