Brasil Foods merger in doubt, shares plummet

By Maria Carolina Marcello

BRASILIA (Reuters) – A key member of Brazil’s antitrust regulator Cade voted Wednesday against the merger that created food processor Brasil Foods, a setback that caused the company’s shares to plummet and prompted the body to suspend a vote on the ruling.

Carlos Ragazzo, the Cade director responsible for the ruling, voted against the June 2009 takeover of poultry producer Sadia by smaller rival Perdigao, saying the move to combine both firms created a giant that exerts too much power in a market where competitors face strong entry barriers.

Fellow members of Brasilia-based Cade’s board decided to suspend the ballot on the ruling until June 15, in order to assess the real impact of a decision that could spark billions of reais in losses to investors, shareholders and state-run lenders. Brasil Foods shares fell about 2 percent in after-market trading, on top of a 6.3 percent tumble in Wednesday’s session.

“Seldom do you see in our antitrust reviews such a deal that embeds such a huge probability of bringing about negative consequences to consumers,” Ragazzo said at the open meeting of the Cade. “The approval of this transaction could lead to higher prices and damages to consumers.”

Cade’s rejection of the transaction could thwart one of Brazil’s biggest government-engineered mergers, one that marked former President Luiz Inacio Lula da Silva’s efforts to create homegrown conglomerates in sectors he deemed as strategic — like commodities, food processing and telecommunications.

Brasil Foods was formed after food giant Perdigao agreed to take over rival Sadia, which failed after reporting billions of dollars in derivatives-related losses in the wake of the global financial crisis of 2008. The government facilitated the transaction by deploying large credit lines through its state development bank BNDES.



The company will seek to speak to the remaining four Cade board members to convince them of the benefits of the existence of Brasil Foods, and find solutions to avert any harm to competition, said Wilson Mello, vice president for institutional relations at the Sao Paulo-based giant.

In his recommendation, Ragazzo noted the “countless” markets in which Brasil Foods has excessive market power, and whose existence creates a virtual barrier to competitors. He cited the market for margarines and some cold cuts as the most ”striking” examples of Brasil Foods’ dominance.

The world’s largest poultry processor has control of a ”sizable” portion of Brazil’s market for frozen pizzas, salamis and other foods, Ragazzo said. He said the only relevant rivals in such markets were Sadia and Perdigao, and that competition suffered badly after their merger.

For months, Brasil Foods officials have alleged that some preliminary reviews by fellow, minor antitrust agencies failed to take account of the fact that 42 percent of the firm’s revenue was from exports. They said independent consultants concluded there would still be strong competition in the sectors in which it operates.

Other Cade officials cited those previous reviews to argue that strict measures should be taken in order to prevent Brasil Foods from damaging competition in the local processed foods market.

“At this point, Mr. Ragazzo’s analysis seems very negative for the creation of Brasil Foods,” wrote Carlos Albano, a consumer industry analyst with Citigroup in Sao Paulo.

Concern over the extent and severity of any restrictions have pushed the stock down 11 percent in the past month, paring back gains over the past 12 months to 19 percent.

Analysts are working with negative scenarios that include the divestiture of minor margarine, cold cuts and other brands, the lease of some operations to competitors and even the sale of one of the flagship Sadia or Perdigao brands to win approval for the merger.

Cade has spent a little less than two years examining the deal. (Additional reporting and writing by Guillermo Parra-Bernal in Sao Paulo; Editing by Bernard Orr and Tim Dobbyn)