Summary

• We explain Oi’s shareholder structure.
• We provide an overview of management’s interests in the company.
• We present the most important institutional shareholders and funds that hold Oi.
• We discuss the development of short-interest in Oi.

Introduction

Oi (NYSE:OIBR ), the large Brazilian telecom company, is going through interesting times lately. After the merger with Portugal Telecom (NYSE:PT ), it is now preparing to sell off PT’s assets to improve its financial situation. On the other hand, recent news suggests a merger with competitor TIM (NYSE:TSU ) could be imminent.

We have already broadly discussed the reasons why Oi’s share price has been hammered throughout 2014. However, we have not paid as much attention to the positions of company executives, institutional investors and private funds toward Oi’s future prospects. Also, little has been said about the short interest in OIBR’s shares as an indicator for overall market sentiment.

We aim to shed light on these factors in our analysis. This should enable us to better understand how the smart and large money stands towards Oi.

The basic and underlying assumption here is people or institutions that are either very close to the company or have large sums to invest (compared to an average individual investor) will be able to use additional information (e.g. insider information, special research) to value a company. As a result, one could use their decisions as a causal indicator for personal investment decisions.

Of course, we lack the empirical evidence to justify such an approach, but we think it is logically sound. Altogether, the following analysis should be best understood as another part of the larger process of analysis.

Directors and management as shareholders

Oi’s 2013 annual report reveals that Oi’s directors and executives held less than 1% of the company’s shares, as of early March 2014. In sum, these 43 persons held around 114,000 shares, compared to roughly 2 billion shares issued (common and preferred shares).

The report for 2012 shows that a year earlier these same group of people held around 400,000 shares (with also 2 billion shares outstanding). Still, this comparatively small amount of shares marks less than 1% of issued shares.

Apart from that, there is no additional information about recent developments in this matter. We assume management is still holding marginal stakes in the company. It is difficult to draw reliable conclusion from this data. We can only observe that the number of shares held is very small. As investors, we would appreciate it if the responsible individuals at the company would also participate in the development of the business as active and significant shareholders.

Institutional shareholders

We will now have a look at the three largest companies, that hold a larger amount of Oi’s shares.

a) Falcon Edge is a New York based investment company. It increased its assets more than 50% in September. It now holds 127 million shares or more than 1% of Oi’s outstanding stock. Falcon Edge has more than $1.5 billion under management. Oi makes up around 4.5% of its assets. Oi is the 11th largest company in Falcon Edge’s portfolio, which currently consists of 29 companies.

b) Discovery Capital is an investment company from Connecticut. It manages $9.3 billion. The company holds more than 130 different companies and recently decreased its position in Oi around 6%. Discovery still holds 58 million shares and therefore owns 0.7% of Oi. 0.46% of its assets are invested in Oi.

c) State Street is located in Boston and manages $961 billion. It has increased its position in Oi by more than 400%. The firm now holds 46 million shares and 0.5% of the company. As State Street is highly diversified and holds more than 3,000 positions, Oi marks an insignificant amount in State Street’s overall portfolio.

Despite the bad news around the company throughout the last months, these institutional players did not get scared and liquidate their positions. Two of the companies increased their positions massively. Falcon Edge, the smallest and least diversified company holds the largest institutional share in OI. We think this is a good sign for individual investors, as this company seems to be definitely convinced about the positive outlook for Oi.

Funds (Some features at the links in this section may require subscription)

a) Black Rock’s closed Global Allocation Inv B fund holds 19 million shares (0.23% of the company) and recently increased its position in Oi by more than 50%. The widely diversified fund has 0.02% of its assets invested in Oi.

b) S&P’s International Dividend ETF (NYSEARCA:DWX ) holds 25 million shares. This amount has been unchanged for a while and marks 0.28% of Oi’s shares and 0.87% of the fund’s assets. The ETF is mainly invested in large non-US based companies.

c) Vanguard’s Emerging Markets Stock Index Inv fund (MUTF:VEMIX ) owns six million shares. The company recently added 40,000 shares. The fund now owns 0.07% of the company and has only 0.01% of its own portfolio invested in Oi.

A look at these different funds and their investment approaches shows that Oi remains an attractive part of their diversified portfolios. Here again, the most invested fund increased its position significantly. The examples should indicate that the mentioned funds (beside many more) are pretty much unaffected by the recent drama around the company.

Short interest

The presented data shows that the overall amount of Oi shares held short extends the daily volume of shares. We should consider this in relation to the short ratio. The latter is reported by Morningstar at around 3 days. This means that it would take 3-4 days for short sellers to cover their positions (see second table). Compared to the highs of nearly 12 days earlier this year, we can read this as an evidence for decreasing short interest and possibly a stabilizing positive sentiment. The average amount of shorted shares is quite stable now for nearly four months and slowly decreasing. In turn we can understand this as an argument for an unchanged market environment for Oi’s shares.

We think, with more positive news in the pipeline, Oi’s short interest might decrease further and we might expect a turnaround in market sentiment. Such a development would be accompanied by both a) increasing daily volume and b) more short sellers covering their position and hence lowering the short ratio.

Conclusion

We do not think the information presented here should be used as a definite buy or sell indicator. Our intention was to give an overview of the different players that hold interests in Oi SA.

First of all, we would appreciate, if the management and the directors would hold larger amounts of shares.

Institutional players seem to have a stable outlook for the company. The most important shareholder here, Falcon Edge, increased its position significantly.

Funds have also maintained their positions.

A comparison to Oi’s peers (VIV, AMX and TSU) shows that OIBR is held by fewer institutional players and funds than these three. We think this is a sign for the relative unloved status of the company. The low share price might also prevent funds from buying Oi’s shares. This rather technical issue might create a tempting opportunity for informed and courageous individual investors prior to the reverse split (scheduled for mid December 2014).

Oi’s future prospects do not look dangerous from this perspective. Large investors have stuck with the company. We expect the reverse split to possibly attract additional funds. The current market sentiment seems stable and slowly turning bullish.

Again, we urge every investor to seek further information about the company before making any investment decision. The information in this article is only one little part of a bigger picture.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Disclosure: The author is long OIBR. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.