E A Shareholder's View On Portugal Telecom's Impropriety

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


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I am a shareholder in Portugal Telecom.

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