Brazilian antitrust regulators voted on Wednesday in favour of an agreement saving the merger that created processed foods company Brasil Foods , which pledged to sell plants, brands and other assets.
Antitrust watchdog Cade endorsed a plan by which Brasil Foods would sell 80 per cent of production capacity for its flagship brand Perdigao and halt the sale of some of it products for between three and five years.
The agreement averts a forced breakup of Brasil Foods, the Sao Paulo-based processed foods giant spawned from the 2009 takeover of debt-ridden Sadia by smaller rival Perdigao. Cade had threatened to derail the merger, citing Brasil Foods' dominance in several market segments.
The outcome is a major victory for Brasil Foods, whose brands dominate supermarket shelves all over Brazil. The cost of an outright breakup of the company would have been much greater than unloading some assets and brands.
"During the short period that we negotiated we showed our willingness to reach an agreement. Likewise, the company changed radically its initial stance," Cade board member Ricardo Ruiz said as he presented the agreement to his fellow regulators.
Yet consumer groups and antitrust lawyers say Cade's approval of the merger is a blow to corporate governance standards in Brazil, Latin America's largest economy.
Brasil Foods is one of the country's biggest government-engineered mergers and was part of former president Luiz Inacio Lula da Silva's efforts to create "national champions" in sectors he deemed strategic, such as commodities, food processing and telecommunications.
State development bank BNDES helped Perdigao inject fresh capital into Sadia, which at the end of 2008 was on the brink of bankruptcy after reporting billions of dollars in derivatives-related losses during the global financial crisis.
Sadia and Perdigao were dominant in most of the markets where they operated, and some analysts say the merger was motivated by political considerations that overruled concerns about market concentration.
Trading in Brasil Foods shares was halted while Cade deliberated the case. The shares jumped 2.2 per cent on Tuesday to 26.01 reais in Sao Paulo. They have risen 4.3 per cent in the past month on optimism that an agreement would be reached to save the merger.
U.S.-traded shares of the company rallied 3.4 per cent to $16.83 on Tuesday.
Part of the rationale behind the agreement is to allow the creation of a sizable rival that could challenge Brasil Foods in some key markets. According to estimates by Raymond James analyst Daniela Bretthauer, the sale of minor brands for cold cuts, margarine, and frozen foods could account for 15 per cent of sales and less than 10 per cent of operating profit.
Regulators could be aiming at lowering Brasil Foods' market share to around 45 per cent in about 10 key market segments where they believe the company exerts over 70 per cent control.
Brazilian beef processor Marfrig has shown interest in the assets that Brasil Foods may sell, a source with direct knowledge of the situation told Reuters.
Brasil Foods committed to selling a total of four slaughterhouses, 10 food processing plants and four more facilities. The agreement will deprive Brasil Foods of selling an estimated 730,000 tonnes of processed foods in the domestic market.
Brasil Foods will not be allowed to create a new brand to replace Perdigao during the restrictions.