Portugal Telecom investigation follows ‘inexplicable’ investment

Just over a year after Portugal Telecom announced a planned merger with Brazil's Oi, which aimed to create a leading global brand, both firms have become mired in a financial scandal which has caused their market value to plummet and raised doubts about Portugal's corporate culture.

On January 6th, authorities raided the offices of Portugal Telecom in Lisbon as part of an investigation into allegedly suspicious investments by the company. At the heart of the probe is its decision last springto spend €897 million on the debt papers of Rioforte, a holding company of the Espírito Santo banking group.

That deal bewildered many observers, especially as soon afterwards Rioforte was declared bankrupt and the Espírito Santo family’s empire started to crumble. Economy minister António Pires de Lima described the operation as “inexplicable” and such fears were borne out when Rioforte defaulted on the debt.

“This investigation relates to suspicions . . . of fraud, with the financial investments of the company being under investigation,” the Portuguese prosecutor said in a statement. The market regulator, police and tax authorities are also involved.

Portugal Telecom’s shares dropped 20 per cent the day after the raid to a record low of €0.64, before recovering later in the week. Its market value has fallen by around 80 per cent over the last year.

The Rioforte scandal had already caused the terms of Portugal Telecom’s merger with Brazilian telecoms giant Oi to be redrawn, with the Portuguese company’s share in the new entity revised down from 37 per cent to 25.6 per cent.

Fernando Ulrich, president of BPI, last week described the merger as "a monstrosity, a tragic marriage" for Portugal Telecom shareholders.

Oi has also suffered, with its shares now trading at around €2, compared to €14 a year ago.

Shareholder meeting

A shareholder meeting was scheduled for today, in which Portugal Telecom would vote on whether to go ahead with the sale of €7.4 billion of its former assets to France’s Altice. If that move went ahead, it would appear to bring a halt to the merger with Oi, which had aimed to create an operator with 100 million clients.

Amid reports that the meeting might be postponed, trading in Portugal Telecom shares was suspended on Friday as the stock market regulator requested “essential information” from the firm ahead of the vote.

The Rioforte debt fiasco has already led to Portugal Telecom chairman Henrique Granadeiro resigning in August, and to Oi chief executive Zeinal Bava stepping down in October. This was despite the latter insisting he had known nothing about the Rioforte deal.

Last week there was another resignation: that of Ricardo Bastos Salgado, who had been head of international business at Novo Banco, a lender created to hold the healthy assets of the troubled Banco Espírito Santo.

His father, Ricardo Salgado, is the patriarch of the Espírito Santo family, whose reputation for competence and austerity was demolished last summer as his corporate empire collapsed under debt. He had to pay €3 million in bail and faces accusations of tax fraud and money-laundering.

The Espírito Santo family had been one of Portugal's most powerful brands. It was close to the military dictatorship which ruled until the 1970s, before going into exile when democracy returned. Ricardo Salgado rebuilt the family's fortune abroad before returning to Portugal and as recently as 2013, the business empire was ranked as the third most powerful in the country by Jornal de Notícias.

Influence

However, its recent debt and legal problems have seen its influence all but wiped out, and Banco Espírito Santo’s role in the Portugal Telecom scandal is under intense scrutiny.

"Banks and politicians have been cosy for a long time, and Espírito Santo is just one example," said Antonio Barroso, an analyst at Teneo Intelligence. "Successive governments delayed dealing with this."