In August 2014, when I was in Portugal buying into Portugal Telecom (PT) after the failure of the Luxembourg holding company, I recommended Rioforte to pay back the $1.1 bn it owed Portugal Telecom. PT had placed this sum in a short term commercial paper loan at the advice of its 15% shareholder, the 2nd largest Portuguese bank, Banco Espirito Santo (BES). 

After Rioforte failed to pay back PT in July the eventual result was bankruptcy of the whole BES group and its own Luxembourg holding company, Groupe Espirito Santo (GES). PT was in a merger deal with Oi (OIBR) which was restructured because PT could not pay what it was supposed to because they money had gone missing in Luxbembourg. 

The rewritten deal is still pending but the eventual aim is to sell PT to Patrick Drahi's own Luxembourg holding company Altice and then OIBR will use the money to buy control of the Telecom Italia Brazilian cellphone firm.

My idea then was:
1) a global Brazil-Portugal telecom company with a decent dividend is worth owning;

2) the Luxembourg government will not let the Espirito Santo family get away with stealing the assets of Rioforte and GES;

3) there are rules and regulators of banking and stocks  in Lisbon which is trying to become a serious marketplace;

and 

4) the assets were worth more than what Rioforte owed PT.

I was right on no. 4 but not the other two. So I am fighting back.

I wrote at the time:

Portugal Telecom's call options for Oi shares depend on monetizing the assets hidden in Luxembourg entities by the former family owners of Banco Espirito Santo of Portugal. The Portuguese bank has now been recapitalized by the state as Novo Banco and the rest is up for grabs. It is held by a bunch of Swiss and Luxembourg interconnected holding companies, the top one of which is Rioforte, which owes PT the repayment of a short-term private placement of euros 897 mn. 

Here are some of the deals being cooked up now for operations directly controlled by Rioforte, as tabulated by Neue Zuericher Zeitung:

1. Tranquilidad, the insurance giant, with sales of euros 1 bn and net profits last year of euros 19 mn is being bid for by US Apollo Global Mgm for an estimated euros 215 mn, including ~150 mn to recapitalize the firm. That means about euros 65 mn in cash is being paid. There are also other insurers like BES Vida, Seguros Logo, T-Vida, and so on;

2. Espirito Santo Saude (Healthcare) controlled through Rioforte and another holding co., is a listed company operating 18 hospitals and clinics and it is a target of a Mexican company, Gruppe Angeles, which offered euros 4.3 per share, or euros 410 mn last week. However, two Portuguese counter-bids, from José de Mello Saude and an insurer, Fidelidade, plus one from the aggressively expanding Chinese Fosun group, which already has bid for a non-related Portuguese bank, and another fromGruppe Amil of Brazil mean this asset is going to be in a global bidding war;

3. The posh Tivoli hotel group which operates in both Portugal and Brazil was already on the market before the BES krach, and the lead bidder was a group headed by Spain'sIberostar hotel chain which offered euros 333 mn but there are rumors that other bid are coming for this directly held bit of Rioforte [Subsequently, American-Thai Minor International Group PCL or MINT, bought the name and 4 Portuguese and 2 Brazilian posh hotels. This is the group of Ellwood Heinecke, which is paying  euros 168 mn. This is only part of what Iberostar bid for]; 

4. So far there are no visible bidders for other Rioforte tourist holdings, lumped together in Espirito Santo Viagens, which include some gems like Top Atlantico, a travel agency; and some global marques like Carlson Wagon Lits, also directly controlled by Rioforte;

5. Banking assets which presumably are solvent, are held via Espirito Santo Financial Group, a sub of Rioforte: Banque Espirito Santo et la Vénétie in Italy, ES Bank Panama, Banque Privée Espirito Santo in Switzerland;

6. Real estate and agriculture companies in Brazil and Portugal are directly owned by Rioforte;

7. Energy investments directly owned by Rioforte are mostly in Brazil.

These assets are worth money but as noted already: it will take time. PT is not the only creditor and it is an unsecured lender. Claims will probably be pro-rated. The bid prices may undervalue the assets because of the bankruptcy. I am voting Si because there is no real alternative to the restructuring of the merger with Oi.

I believe someone at PT should be sacked for having made the placement in Rioforte because there must have been a person at fault. Has PT used Rioforte to earn money on its cash in earlier events, like when it collected from Telefonica de España for selling control of Vivo in Brazil, which it then paid to shareholders of PT with a 9-mo delay partially imposed by the Portuguese taxman? 

I want also to know if PT sought government regulatory or independent advice from rating agencies or others before trusting its loot to Rioforte, or if the plan was to gain a bit off money offshore not subject to Portuguse taxes. Or if someone got a finder's fee!

[Subsequently in a Portuguese investigation of the matter, then Portugal Telecom CEO Zainal Mohammed Bava swore on the Koran that he had no knowledge of the Rioforte placement and the CFO told the investigators that he had been advised by the company's bankers, BES, to place the funds with Rioforte and did not consider this to indicate risk. Auditors have been scathing about this but nobody has been sacked or sent to jail yet.]

Below is a copy of the letter I sent about this matter:

To the Nucleo de Analise de Patricipações Qualificados at Portugal Telecom SGPS:

Dear Mr. Norberto A. Andrade,

Dear Mr. Manuel M. Barreiro,

Your reference 20472809

Thank you for your registered letter of March 9, 2015 in reply to my e­mail of February 18 regarding the need for measures by the audit committee of Portugal Telecom SGPS (PT) over the placement of euros 867 million in a short­-term commercial paper issue by Rioforte, a Luxembourg holding company linked to the now­bankrupt Banco Espirito Santo (BES) of Portugal.

I understand from your note that the audit committee began acting on this matter as of July 2, 2014 when it “became aware of the existence of significant investments in Rioforte financial instruments”, and that three board reports were prepared on this matter dated July 10, July 25, and August 5, all in 2014. I also understand that on July 7 PriceWaterhouseCooper (PWC) was charged with producing an independent review of this investment, which was published on August 1, also in 2014.

This followed the failure of Rioforte to pay back the debt it owed to PT when it became due, on July 15, 2014. As a result, ultimately BES also filed for bankruptcy. Prior to that time, the BES parent reported that there were “serious deficiencies in the accounts of Rioforte.”

However, this does not end the matter from the point of view of a shareholder in PT, like myself. It also appears that Octavio Viana, the head of AMEC investor association, at that time sought to initiate legal action against PT's board over the Rioforte investment.

The problem is over the initial April 2014 placement of the money in Rioforte, not over the failure to repay it. The Portuguese Attorney General’s office at the time announced it has launched “various inquiries” into the banking crisis within Grupo Espirito Santo (the GES, the parent of BES, the bank). At that time some 50 Portugal Telecom shareholders initiated a lawsuit where Mr

Viana alleged that there were “serious violations in management duty” on the part of PT’s executive board.

Mr. Viana then said: “It is unthinkable that a careful, diligent management with technical knowledge could place 40 percent of its company’s liquidity in 2013 and almost 50 percent of its share capital in a single entity.” Any investment should have taken into account a possibility that Rioforte might fail to repay the money such as ultimately did occur.

The latest Portuguese Parliamentary inquiry into the Rioforte loan heard in a statement sworn (on the Koran?) from the Chief Executive Officer (CEO) of PT, Mr Zainal M. Bava, that he had no knowledge of the euros 867 million placement into Rioforte. At the time it was made he said he was busy in Brazil preparing for the merger of PT with OIBR, a local Brazilian telecommunications company.

While Mr. Bava did not authorize the placement, somebody else in management clearly had to have done so. I would like to know who that was, and if that person was acting with proper authority from the board or the management of PT.

I would also like to know if any guarantees were given to PT over this placement by the intermediary in the transfer of the funds (on two different dates), the former Banco Espirito Santo (BES).

BES at that time was a shareholder in PT, holding about 15% of the outstanding shares. I think this dates back to the period when PT was privatized and BES was the underwriter, but I am not sure.

I think I am correct in saying that there is no counter­party shareholding by PT in the former BES, but I would like to confirm that.

I would also like to know if the arranger of the placement was given any finders' fees for doing so, as is often the custom. If so, he or she should be questioned about whether this move was made for personal gain rather than the good of the company.

These matters are important because of what is emerging now about other lenders to elements of the BES and GES group during the same spring of 2014. Here in the US we learned about two entities which placed funds with BES and GES at the same time as PT did.

One was Goldman Sachs, which apparently is counted as an “insider” because it has a subsidiary that owns a small position in BES's capital. This led the Bank of Portugal and the Stock Exchange Authorities (the central bank and the CMVM) to deny Goldman Sachs the right to recourse to collect on its bond holding.

Another claimant, the Superannuation Fund of New Zealand, a government pension plan, is suing the BofP for not being given back the money it lent to BES. It also appears that the NZ pension plan placement resulted in Goldman Sachs collecting a finder's fee for this.

I also hear that the PWC audit has been questioned by other analysts of the BES mess and that another inquiry will take place.

Given that Rioforte claimed to own assets that are currently being sold I would like to know if there are any claims that PT can bring to get the proceeds. If I understand correctly, among the assets being sold are a chain of medical centers which were sold to a Mexican group, presumably for cash.

Another holding is some of the Hoteis Tivoli in Portugal and Brazil. I have stayed in the one in Lisbon and the beautiful on near Carvoeiro in the Algarve, and think they should command full price. The buyer is a Thai­American who owns Minor International PCL in Bangkok, I believe. I hope the euros 168.2 million Mr. William Ellwood Heinecke's group is paying for 4 Portuguese and 2 Brazilian hotels and the valuable name is the right price.

Rioforte also claimed to own a travel agency, a land bank in Brazil, agricultural land in Portugal, hospitals, and other assets. The proceeds from all these sales should be available to its largest creditor, namely PT. I don't think the money from these sales should go to members of the Salgado Espirito Santo family and if this is what Luxembourg law on protection of creditors requires, that PT should seek legal advice to defend our rights.

Another factor is the hasty sale of PT assets to a different Luxembourg entity, Altice, owned by Patrick Drahi, a Franco­ Israeli telecommunications magnate. This was done to enable Oi to buy an Italian­owned Brazilian network.

It is my impression that the Lisbon CMVM felt that the haste with which a deal was done by PT and OIBR was unfair to ordinary shareholders and those owners of PT and its American Depositary Receipts (ADR). The CMVM required that the vote be delayed. At that time I wrote to PT investor relations that the vote was scheduled to take place before the ADR owners had received their proxies. We are supposed to be treated pari pasu with Lisbon shareholders.

Another matter is the disposal of the assets of PT which are not in Portugal but in former colonies. I note that Ms. Isabel dos Santos, MBA, the richest woman in Africa, attempted to buy PT before a deal was struck with Altice. While Ms dos Santos apparently does not have clean hands, being the daughter of the Angolan dictator, I don't think the PT male white hands are that
much cleaner than hers. She is also now involved in bank mergers in Portugal.

Back in the days of Portuguese dictator, Salazar, PT (along with its controller, the postal service) cooperated in phone tapping to harass, jail, exile, and kill opponents of the regime. None of the players in this imbroglio can be called “saintly” or “holy”, whatever their names. There are also subsidiaries in Mozambique and some interests in Macao. Again for the shareholder, these should be monetized by PT.

Thank you for letting me write in English. While I studied Portuguese at the Fundação Gulbenkian in Paris and can read the language, I do not write Portuguese.

Sincerely yours,
Vivian Lewis, shareholder and editor, www.global­investing.com