Cade fails to clip BRF’s wings
Cade, Brazil’s anti-trust regulator, did the best it could with Brasil Foods. Under the country’s merger approval system, blocking the deal that created Brazil’s dominant frozen meat company and the biggest chicken exporter would only have meant spending months – possibly years – in court.
Brazil’s government encouraged the creation of Brasil Foods in 2009 when food-processor Perdigão took over debt-ridden rival Sadia. State development bank BNDES helped Perdigão with the rescue of its larger rival, which was close to bankruptcy after losing money on derivatives during the global financial crisis.
In the process, Brazil created a national champion capable of taking on the global chicken market. But the downside, at least for Brazilian consumers, is that the company also has 70-80 per cent market share in some of its key products in Brazil.
Investors took fright last month when a director of Cade said he was opposed to the deal, knocking $1.6bn off Brasil Foods’ market value in a two-day share plunge.
But the fact is, Cade is not good at stopping deals – it has blocked only one in every one thousand deals that it has reviewed and most of those it has tried to halt have ended up in the courts.
The problem for Cade is Brazil’s unusual system of mandatory and post merger reviews of deals. Sometimes, as in Brasil Foods’ case, by the time Cade has made up its mind, the newly combined group is already merged and in full swing. Unpicking it at this late stage can be awkward, costly and, well, downright unreasonable.
On the other hand, Brazil’s relatively weak antitrust regime is bad for consumer rights. The government is considering legislation to fix it, which Bloomberg reports is now expected to be passed by the lower house in August. That will be none too soon.
As Ana Paula Martinez, of law firm Levy & Salomão Advogados in São Paulo, says:
“Despite the merits of the case, the review of the Brasil Foods transaction has reinforced the need for Brazil to adopt a pre-merger system. For several years, there has been pending in the Brazilian Congress a comprehensive legislation that would remedy many of the problems that have plagued the Brazilian competition system for so long, specifically the current post-merger system.
Cade has blocked eight transactions out of approximately eight thousand reviewed since 1994 – and most of such decisions are still being challenged before the courts. Under the current scenario, whenever faced with a complex transaction, reaching a settlement with the parties might be the only viable solution to Cade. Passing the new legislation as soon as possible is key given the wave of Brazil’s M&A activity.”
Brasil Foods gets go-ahead to merge with rival
In a landmark ruling, Brasil Foods, the world’s biggest poultry exporter, has won antitrust approval for a merger with its main competitor, Sadia, but must suspend one of its main brands and sell some assets.
The ruling was one of the most aggressive by Brazil’s antitrust regulator, Cade, but will not alleviate concerns over the country’s post-merger approval system in which few deals are blocked and decisions are issued sometimes years after deals have gone through.
“The company ... is pleased that the matter has ended at the administrative level by signing an agreement with CADE, thus avoiding a future scenario of uncertainty and preserving the essence of the merger,” Brasil Foods said.
Markets were nervous that Cade might order Brasil Foods to be dismantled after a key director of the regulator last month voiced his opposition to the $3.8bn government-backed merger of food processors Perdigão and Sadia that created the frozen foods group in 2009.
Brasil Foods directors have been working with Cade to come up with a solution to lessen the combined group’s dominance of the fast-food market, resulting in Wednesday’s agreement.
The company agreed to suspend the use of Perdigão, one of its main brands, on some products for three to five years as well as its Batavo brand on all meat goods for four years.
The deal also involves the disposal of 12 other brands, 10 food-processing plants, eight distribution centres and several pork and chicken slaughterhouses, and requires Brasil Foods to hand over contracts with rural producers in its supply chain.
The company’s shares jumped by 9.8 per cent after the ruling to R$28.55, the biggest rise in more than two years. But it is not clear whether the settlement is enough to mitigate Brasil Foods’ 70-80 per cent combined share of some of its key markets. It comes amid efforts to change Brazil’s merger approval system, the only one of its kind alongside those of Pakistan and Egypt.
Brazil is considering legislation to change the law to give Cade four months to make a decision and, crucially, forbid companies from merging until they get prior approval.
Under the present system, Cade has reviewed 8,000 transactions and blocked only eight of them. Even when it does block deals, these are usually challenged in court, where they can languish for years.
“Passing the new legislation as soon as possible is key given the wave of Brazil’s M&A activity,” said Ana Paula Martinez, a lawyer with Levy & Salomão Advogados in São Paulo.
