Short interest in Portugal Telecom, SGPS (ADR) (NYSE:PT) (ELI:PTC) increased by nearly 40% from the beginning of July to the mid of August. The telecom company was shaken by the corruption scandals in Portuguese group, Espirito Santo International, which holds a 10% stake in Portugal Telecom.

Portugal Telecom is one of the creditors of Rioforte, a financing arm of ESI. PT held bonds worth 900 million euros on which Rioforte defaulted last month. As bondholders were left unpaid and spreads widened, shares of Portugal Telecom were punished in the market. PT is down 42% since July and nearly 50% for the year.

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Portugal Telecom

 

Elliott and other hedge funds score as Portugal Telecom drops

Hedge funds who were betting on the fall of Portugal Telecom, SGPS (ADR) (NYSE:PT) (ELI:PTC) made a nice profit. Paul Singer’s Elliott Management has been shorting PT since April of 2014, according to filings made with the Portuguese regulatory authority, CMVM. At present Elliott Management has a 2.03% short position which according to the latest data from July 17th. From April to date, shares of PT have dropped from $4.27 to $2.12, so Elliott possibly grabbed a 50% profit on this trade.

Other shortsellers include, Falcon Edge Capital which holds a 1.13% short, Jericho Capital a 1.31% position, and Logos International holds a 0.67% short position in Portugal Telecom. Other hedge funds who have shorted the stock in the past few months include,, BTG Pactual, Marshall Wace, Discovery Capital and Pine River Capital. BTG Pactual, the Brazilian investment bank, was also one of the largest holders of Banco Espirito Santo SA (ELI:BES) bonds that were written down to zero after the bank received EU’s bailout package.

Portugal Telecom revises terms of merger deal

Towards the end of last year, Portugal Telecom, SGPS (ADR) (NYSE:PT) (ELI:PTC) announced that it will be merging with Oi SA (ADR) (NYSE:OIBR) (BVMF:OIBR3), its Brazilian counterpart. Amid the stigma surrounding Espirito Santo Group, Portugal Telecom had to face troubles with the proposed merger as well. The terms of its merger with Brazil’s Oi SA had to be revised after Rioforte left it stranded on the debt payment. The revised agreement would dip PT’s stake in the merged company from 38% to 26%. Portugal Telecom would have to buy back the 900 million bonds that were transferred to the Brazilian company and in exchange 16.6% of PT’s capital would be transferred to Oi.

In a research report by UBS, the price target for Portugal Telecom, SGPS (ADR) (NYSE:PT) (ELI:PTC) was revised down to €1.3, after the terms of the merger agreement were changed. The report said that Portugal Telecom’s sole asset will be its interest in Oi. PT has a call option on 16.6% of its share capital that was transferred to Oi, which PT can exercise after six years. In Millennium Investment Banking’s report, analyst Alexandra Delgado, also reduced the price target of the Portuguese company. Delgado said that business execution in Brazil is now the key to both Portugal Telecom and Oi’s success and given the current condition of Brazilian market; the recovery will be slow.