GOL: The Downside of Insider Ownership

Many people talk about how important it is to buy shares of companies that have strong family or management ownership, because that means there is someone intimately involved with the day to day operations who has the same motivation as common shareholders.

And I agree... in general. But when a family or individual has a real majority of the shares, or a majority of the voting shares, you can sometimes get into trouble. So here we have a rare opportunity to hear a shareholder be a little bit grumpy about an event that has caused a one-day 10% move UP in one of his stocks.

Case in point ... maybe: Gol Linhas Aereas Inteligentes (GOL).

This is one of my favorite holdings, an upstart low-cost airline started by the family that ran one of the more successful bus lines in Brazil, and now the second largest airline in Brazil (they even bought out the old state flagship airline, Varig, for pennies on the dollar last year to get more airport slots and expand internationally).

Gol has been taking a beating over the past several months -- my shares are underwater by a little bit even today, after our 10% jump.

Why have they fallen? Well, the immediate cause was the crash of a TAM jet on a runway that caused restrictive rules limiting air traffic in Brazil's busiest airports, and limited bad weather flying (well, bad weather landing really ... but frankly, if you can't land most people don't want to fly). Before that, a crash of a GOL jet last year (not their fault) caused more of an uproar.

But both of those events were just symptoms -- the real problem is Brazil's civil aviation infrastructure, which everyone up to and including President Lula has recognized as an issue. The country's air traffic control, as in many other countries, is still run by the military, and they have not grown airport capacity or air traffic control capacity nearly quickly enough to absorb the huge demand for air travel spurred by Gol's low price tickets and the general boom in the Brazilian economy. Brazil, after all, is a pretty massive country physically, and the roads generally stink and they don't have a nice railroad infrastructure or other similar options ... convenient mass air travel is a natural evolution for them.

So what to do? Well, a bargain hunter would say that you can now buy shares of GOL for a significant discount to their real value, as the leading low cost airline in Brazil, and potentially a leading international and South American airline, because of these problems that are not specific to this airline.

Of course, you'd have to have a strong stomach because it's unclear whether the infrastructure problems will be solved in the next year or two, or at all, though I believe the government will see the sense in investing in this area and building a modern air traffic system and expanding airport capacity in the near future.

And, whether or not you have a strong stomach, it appears that the Oliveira family does. They're the founders and controlling shareholders in GOL, and they're apparently a little bit pissed (some of the family members, anyway) that the shares have fallen close to 50% from their highs.

I understand, believe me. But it appears that one tack they might take is to buy out the balance of the shares and take the company private, which is what is behind the 10%+ bump up today in both Brazil and the US. There was a good Bloomberg article about this just a little while ago, and an AP article that covered more or less the same ground.

So that's the risk I'm talking about: When someone owns and controls a company with a significant majority of the shares and voting power, they can sometimes take your shares out from under you even if you think the shares remain significantly underpriced -- the Oliveira family has all the voting shares, and owns close to 70% of the company.

And in this case, we have the added intrigue that apparently there's some dispute within the family about what should be done -- after all, even with the rapid share price decline in recent months, GOL has certainly enjoyed the cheap funding provided by the public markets that has enabled them to grow their fleet extremely rapidly with very little debt.

Now, I obviously don't know any more than you about whether or not this will actually happen, and I don't know exactly what the rules would be for a takeunder, how many folks would have to respond to a tender before the rest could be involuntarily bought out, etc. It's probably complicated by the fact that GOL has lots of shareholders in both Brazil and the US.

But I do know that If I wanted to sell my GOL shares, I would have done so (were I prescient and brilliant) when the price was in the high-$30s. I continue to believe, as the Oliveira family apparently does, that the long term potential is spectacular as long as Brazil eventually, preferably soon, cleans up the system that GOL has to work within. I don't want the company to take these shares from me at $25 or $30 this year, should that be possible ... and with such a huge controlling interest, it might be.

I'm still a fan of big insider ownership in general, of course, but it's not always entirely a good thing for other shareholders. Even in this case it might work out, since a going private buyout would at least bring the shares up somewhat from this level, and might even bring my shares into the black -- but for those, like me, who want to wait it out and see the recovery of the industry before considering selling, owning shares in a family-controlled company can mean that our options are not as many as we would like.

I own several companies that have large insider ownership positions -- John Fredriksen's Seadrill comes to mind, for example, but large ownership can perhaps give more benefits to individual shareholders when it's large minority ownership. Fredriksen, for example, generally owns about 30% of the shares of his companies, which is enough for him to steer the company and be incentivized to benefit common shareholders (and in his case, push for high dividends), but not necessarily enough, at least on paper, to allow him to do absolutely anything he wants with the firm.

We'll see how it turns out -- Gol has failed so far to take part in Brazil's remarkable stock market performance this year, but I'm confident that the shares are low for reasons outside the company's control. Unfortunately, my shares may soon be outside my control, too, so I'll just have to take the trust that I put in the Oliveira family and see where they decide to take me.

Disclosure: Just to be perfectly clear, I do own GOL shares (at an average cost of about $27) and Seadrill shares (average cost of just under $15). I don't own any other stocks or companies mentioned above.