Stock’s 88% Plunge Has Activist Attacking Brazil Bookstore Giant

Updated on
  • GWI questions management bonus, says company nears insolvency
  • Saraiva calls for probe on possible stock manipulation

More than a century after his grandfather founded the company, the 31-year-old heir to Brazil’s largest chain of bookstores is locked in a bitter fight with the company’s largest shareholder.

GWI Asset Management has accused Saraiva SA Livreiros Editores and Chief Executive Officer Jorge Saraiva Neto of bringing the bookseller to the brink of insolvency, doling out excessive compensation to executives and general incompetence that has resulted in losses in six of the past eight quarters. Not to be outdone, Saraiva accuses GWI of engaging in stock manipulation, says the asset manager’s CEO illegally broke into its offices, and is asking that the investor’s rights as a shareholder be revoked.

The battle playing out in Brazilian courts and boardrooms comes as shares of the 102-year-old bookseller have tumbled 24 percent this year and after an 88 percent plunge over the past five years. The drop is crushing returns for the oldest fund managed by GWI -- which was founded in 1995 and caters mostly to Brazilians of Korean descent -- which has lost 7.8 percent this year even as the country’s stocks post the world’s biggest gains. The performance puts it at the bottom 5 percent of its peers, according to data compiled by Bloomberg.

“The controlling family is being heavily criticized by minority shareholders for failing in restructuring the company,” Bruce Barbosa, an analyst at equity-advisory firm Empiricus Research, said in a note to clients. “We don’t know where all this drama will end, and we recommend people to keep a safe distance from the shares.”

After GWI tried to call a shareholder meeting, arguing that measures were needed to bring the company back from “the brink of insolvency,” Saraiva went to court to suspend the assembly, according to a regulatory filing. It also asked Brazil’s securities regulator to investigate signs of stock manipulation in GWI’s trades, and accused Mu Hak You -- GWI’s CEO and a member of the bookseller’s board -- of sneaking into Saraiva’s Sao Paulo offices during a long weekend in May to go through documents kept by management.

GWI denies the allegations and says the investor paid a visit to Saraiva’s headquarters on a business day during regular hours, with executives aware he was coming in advance. It says that the decision to pay a 3.4 million real ($1 million) bonus to the management team was inappropriate given the losses the company has reported.

Saraiva, which has a market value of about $31 million, didn’t respond to a request for comment. GWI declined to comment on the dispute. Saraiva shares account for about 40 percent of holdings in the GWI Classic equity fund, according to data compiled by Bloomberg.

GWI has been criticized before by companies it invests in. In 2011, the then-chief executive officer of Marfrig Alimentos SA linked a 40 percent slump in the meatpacker’s shares to GWI’s decision to dump its stake over a short period of time. Back then, GWI was seeking to cover losses after a global market selloff crushed its leveraged equity holdings.

In a statement last week, GWI said all its trades are within limits set by the Sao Paulo exchange and Brazil’s securities regulator. The next development in the dispute may come at a a shareholder meeting July 25, when the bookseller’s management will seek to remove You from its board, to revoke GWI’s shareholder rights and to decide if the company will be granted permission to sue You for damages.

— With assistance by Lester Pimentel

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