UPDATE: Brazil Approves Sadia-Perdigao Merger In 4-1 Vote

Brazilian antitrust regulator Cade on Wednesday approved the merger of the country's biggest food processors to create BRF Brasil Foods SA (BRFS, BRFS3.BR) after imposing restrictions on the deal.

In a decision that Cade board members called the biggest intervention ever by the regulatory agency, BRF will have to get rid of or suspend about 12% of production capacity in order to create a rival that can effectively compete with the company. But the market received the news well, with shares jumping and analysts saying that the company's growth prospects won't be significantly hurt by the restrictions.

BRF, created in 2009 by the partial merger of Sadia SA and Perdigao SA, controls more than half of the market for most processed foods, and upwards of 80% in the case of some food items. As part of the deal, the company will sell several processing factories, slaughterhouses, and poultry farms, as well as eight distribution centers and 12 minor food brands. The company will also have to suspend sales under the Perdigao brand for up to five years--in the case of frozen food items like pizzas and lasagnas--and three years for some processed pork products.

"This is now the biggest case ever in the history of the agency," said Olavo Zago Chinaglia, outdistancing previous mergers that created Latin America's biggest brewer, Companhia de Bebidas das Americas (ABV, AMBV4.BR), or AmBev, and the takeover of Brazil's Garoto brand of chocolates by Nestle SA (NSRGY, NESN.VX).

BRF's assets will have to be sold to a single buyer, Cade said, which is meant to create a strong competitor for BRF with an integrated and national network. The company is prohibited from selling the restricted Perdigao products under new brands, and can't buy back the productive assets during the next 10 years.

"This was positive for the company as it was a very reasonable alternative" to having to sell Perdigao outright, said Caue Pinheiro, analyst at brokerage SLW Corretora in Sao Paulo. "The Sadia and Perdigao brand were the favorites. The company will have to go without Perdigao for a while, but that just means Sadia will be alone in dominating the market."

Shares jumped 10.3% to BRL 28.69 at 1933GMT in Sao Paulo trading, and climbed as high as BRL29.15.

The sale of assets and the suspension of certain brands will affect about 12% of sales volume and about 13% of net revenue, BRF said in a regulatory filing, citing 2010 data. The three-to-five-year restrictions on Perdigao will affect about one-third of the brand's sales, BRF said.

Lead Cade board member Carlos Ragazzo maintained his vote against the deal, while the remaining four members approved the merger of Sadia and Perdigao, which was disclosed in 2009.

Ragazzo voted against the merger last month, which prompted BRF to hold regular meetings with the board members who hadn't voted in order to work out a satisfactory deal.

Ragazzo reiterated his view that Sadia and Perdigao were each other's only effective competitor, and had demanded the selling of either the Sadia or Perdigao brand. Other board members said the barrier to market entry for competitors, while high, wasn't impossible, due in part to the steadily growing Brazilian consumer market.

"The suspension of the Perdigao brands was the only credible option since there was no way that we could transfer the brand" to another company, Cade board member Ricardo Ruiz said in Brasilia.

The sale of assets capable of processing 730,000 tons of food products annually could benefit BRF by giving the company a fresh injection of cash, SLW's Pinheiro said.

"Whomever is interested in buying will have to pay a fair price as these are good assets," he said. But he noted that this may not be the best time to sell those assets as finding cheap financing for the buy could prove difficult.

The assets to be sold are also subject to restrictions imposed by Cade. In order to ensure adequate competition levels in terms of sales, BRF has to maintain, until the sale is complete, current levels of employment, marketing investment, and market share, Cade said.

Violation of the agreement will result in fines, and repeat offenses could lead Cade to change its vote and reverse the merger.

-By Paulo Winterstein, Dow Jones Newswires; 55-11-3544-7073; paulo.winterstein@dowjones.com

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