Friday, 17 October 2014

A follow up in BES and OI-PT merger

A follow up in BES and OI-PT merger
Most likely everybody already knows the follow up in both these situations.  Basically, Warren Buffett says that if a management lacks integrity, intelligence and energy will kill you. It seems there was at least one very energetic and intelligent person on this whole situation.

First the BES situation:
-As it has turned out, it seems there were “some” extra weak links besides those previously reported.
-In addition, this was a bank and banks are dependent on clients, if clients are fearful the bank explodes. And this last part is one of my main motives to keep banking outside my circle of competence. As I said back then : “I could try to learn it but I doubt it would be useful in this particular case”. That survival risk is also the problem in distressed investing, which I also said is out of my circle of competence (distressed investing is not the same as an all or nothing investing situation, this last one I would do).
- This last part lead to government intervention separating the bank in a bad bank and a good bank. Shareholders and junior unsecured debt went to the bad bank, deposits and senior debt went to the good bank. Shareholders and junior debt did not get screwed in this situation since they will kept the higher between liquidation value or the profit of the good bank sale. Up to now it seems the mistake was not including senior debt on the bad bank and most likely there will be little to nothing for prior shareholders (they were already screwed when the government intervened).
- A mention to the “ESFG has had to establish an "unconditional and irrevocable guarantee of EUR 700 million". Whatever that is it might mean that part of the problem might be covered”. It seems it was secured by the insurance company of ESFG. It is said that after that guarantee was given the insurance company was used to finance other GES companies and as such very little remained. It is hard to know yet where the truth lies but at least it seems that the insurance company is now worth way less than what it was supposed to secure.

And the OI-PT merger:
-          On my last post I said “ It seems likely that the merger will happen anyway but it also seems likely that (if PT isn't paid back in full in due time) the terms will be changed and maybe PT shareholders will receive a worse ratio than expected.” The terms were changed.
-          Basically the ratio was changed but PT shareholders will receive the Corpco Shares in the newly stated ratio PLUS the Corpco shares that can be bought with the recovered money (discounted for the time value of money as decided at the time of the new deal).
-          The thing is that despite some good news on the Rio Forte side (they already sold two businesses, one for an undisclosed amount and the other on a disputed public acquisition- Espirito Santo Saude is a quoted company- that seems to have lead to a nice price) the responsible Luxembourg court decided that anyway controlled gestion was not possible and liquidation should ensue. That basically means that despite these good news there might not be much there to be recovered. 
-          Taking into account these last two points and since I have been told the gap between Oi and PT prices is still huge, the arbitrage is most likely on again. The problem here is that there is no defined duration for the arbitrage and there is the risk that things turn out a lot better than expected in Rio Forte. As such maybe it is not worth the effort, but if you are interested to a quick check, you might find it is worth it.

PS: in a few days I might do a post about related party deals in Toyota Caetano. I have already written about it in a Portuguese forum but it is in Portuguese. As a spoiler I would say that I still have not sold any shares (but if the market crashes and Toyota Caetano does not I might sell some shares to increase diversification)

Disclaimer: I own Toyota Caetano shares. I have no position in the other stocks mentioned, I have no other knowledge than what goes on the news but since most of you are not Portuguese and do not follow Portuguese news this post might have some use. There might be some mistakes on this post so do your homework. Feel free to comment on any of my posts, I do not mind feedback. Always read the introduction post.

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