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.
"The solution was a good one and accomodated our needs as well
as answering to the concerns of the antitrust agency," BRF Chief
Executive Jose Antonio do Prado Fay told reporters in Sao Paulo.
"The agreement shows the maturity of the process and that Brazil
can handle such a large and complex merger such as ours, which is
going to be common going forward."
The current agreement came about after the regulator signaled in
June it would block the merger, despite assured statements by the
company that such a merger would create a "national champion" that
could compete globally. The restrictions imposed Wednesday,
however, showed that the regulator was more interested in
maintaining domestic competition than extending the reach of
Brazilian companies.
The criticism that government regulators were promoting
Brazilian conglomerates over domestic consumers cropped up again
during merger talks between retailer Cia Brasileira de Distribuicao
and France's Carrefour, and was one of the apparent reasons that
led government development bank BNDES to back out of the deal on
Tuesday.
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 preferably be sold to a single buyer, Cade
said, in order 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.
The suspension of the brands will begin as soon as the BRF finds
a buyer for them, the company said. CEO Fay said that he has no
preference for a buyer other than "whomever pays the most," even if
the prospective buyer is a strong rival. The sale won't happen this
year, but could be completed by the end of 2012, Fay said.
"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 brands 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.
The sold-off assets brought in about BRL1.7 billion in revenue,
and the suspended brands about BRL1.2 billion, but Fay said he
expects to be able to make up for that lost revenue by the end of
next year. The merger approval also allows the company to fully
capture synergies, since the businesses no longer have to remain
separate, Fay said. He expects savings to reach BRL500 million
already next year.
During Wednesday's vote, 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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