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M&A & The New CADE


I read it in O Globo, which cites the findings of PwC: Brazilian M&A deals in 2012 — 770 — up 2.5% from 2011.

I read recently — without recollecting where — that Brazil’s antitrust regulator is undergoing some structural changes in order to streamline bureaucracy and catch up to its Dickensian backlog of cases.

An interesting question to consider: how will streamlined due process affect rule-enforcement at a regulator recently redesigned and given new powers.

The government visibly wants deals cleared efficiently — part of its industrial strategy is creating international JVs and Brazilian multinationals.

Confession: This is one of those topics I need to read up on before venturing an opinion. Mondaq has a thorough article on the topic, and the blog Fusões e Acquisições is a useful and up to date lusophone source .

In the meantime, I will jot down some notes — my rough & ready translation — and then present selections from catalog of significant deals prepared by the ever-reliable Valor Econômico.

Greasing the Wheels

Source: Administradores.com. Begin translated excerpt.

M&A deals should be dealt with more rapidly by a less bureaucratic procedure in the coming months. The federal Chamber of Deputies is considering a bill — PL 3937/04 — that proposes further structural changes in the antitrust regulator CADE.

By the number assigned, it seems that this bill was introduced in 2004 and is only now making its way to the floor for a vote. As a matter of fact, a look at the legislatve record seems to indicate it is still occupying real estate on the  mesa, though it is classified as urgent.. 

One of the principal points of debate over the bill is that it requires companies to submit a report on potential market concentration before CADE takes up the case.

Currently, this evaluation is performed 15 days either for or after the conclusion of the merger or acquisition, which leaves business owners in a state of uncertainty.

The case most often cited by legal experts on this topic was the Nestle-Garoto deal. More than three years after the companies combined, CADE vetoed the deal. The problem is not so much the criteria used as it is the regulatory delay.

“When you do a deal like Nestlé-Garoto, in which you are much later ordered to separate the two operatons, the company suffers greatly. With prior approval, the deal maker enjoys certain guarantees,” says Rodrigo Camargo of Frignani e Andrade Advogados Associados.

The changes introduced by Bill 3937/04 have been greeted with approval by M&A profesionals, although some doubts and concerns remain.  A partner in the law firm of Pinheiro Neto Advogados, Cristiane Saccab Zarzur lists the principal changes in the operation of CADE.

Playbook 2013

For future reference — you can google your own blog to find back articles –a playbook for major Brazilian M&As in 2013. Source: Valor

Importing toys, producing steel, merger and acquisitions in the metapacking business, the sale of hospitals and even the sale of condoms are among the important cases on the docket of the National Administration Council for the Defense of the Economy (CADE) early this year. Among the priority cases are the merger of Pão de Açúcar, Casas Bahia and Ponto Frio, as well as the creation of Globex.

The Globex case will be decided in March, after which the acquisition of Bertin by JBS will be considered.

Decisions are being reached today, during the first plenary session of the year. CADE is expected to sign a deal with Philip Morris under which the cigarette manufacturer will refrain from requiring exclusivity in product placement and advertising at the point of sale — a case that has dragged on for 15 years. In June 2012, Souza Cruz signed a similar deal and paid a fine of R$ 2.9 million. Now it is the turn of Philip Morris, although it will pay CADE a lesser fine.

Among members of  the “Yellow List” of antitrust proceedings on which CADE must focus more of its time and attention, two stand out: The triple merger of Pão de Açúcar, Casas Bahia and Ponto Frio and the creation of Globex.

According to the rapporteur assigned to the Globex case, Marcos Paulo Veríssimo, a decision should be ready in March. After deciding the Globex case, CADE will await the outcome of the sale of Bertin to JBS.

Decisions should begin today, during the first session of the year, during which CADE will sign an accord with Philip Morris in which the cigarette company will no longer require exclusivity in advertising and product placement at points of sale [such as newspaper kiosks]. The deal brings to an end a legal battle lasting some 15 years. In 1998, Philip Morris complained to Cade about Souza Cruz, claiming that its rival was entering into contracts with points of sale under which only Souza Cruz product advertising would be displayed. As a first step, CADE banned the contractual exclusivity of a company’s brand at a given point of sale.. Next, CADE vetoed exclusive advertising deals in points of sale. In June 2012, Souza Cruz signed a deal with CADE, promising to comply with the decision and paid a fine of R$ 2.9 million. Now it is the turn of Philip Morris.

During its January 30 session, the full council will rule on the year’s second major case. The antitrust council will decide whether automakers can fix prices for those who resell their products. The case involves SKF, a machinery factory that makes everything from hydraulic equipment to materials for the auto industry.

In the U.S., the first legal ruling on resale prices was handed down in 1911. In Brazil, CADE would not address the issue well into the 1990s, in a case involving Kibon and its list of suggested prices for its products.

In that case, Kibon was not punished because CADE found that the pricing table was a suggestion and not an imposition. In the SKF case, there are currently two votes for acquital and three votes for conviction. On January 30, Veríssimo and CADE council member will cast the remaining two votes in the process.

The sale of Ola by Hypermarcas should be decided sometime between February and April. The case is considered one of the most significant of the year because it represents the merger of Ola with Jontex. The rapporteur of the case, Alessandro Octaviani, paid a personal visit to the condom factory inSão Roque (SP) in order to clear up pending questions about the business and its market.

One of the dilemmas of the case is to determine whether there is sufficient competition among different makes and models of condoms, such as the premium category and the fruit-flavored variety. Results of these analyses will be taken up by the rapporteur, who will then recommend to the plenary session whether or not the deal should be allowed to proceed, with restrictions or not.

Anhanguera’s acquisitions in the education sector and Qualicorp’s in the health insurance sector are so complex that the CADE will have to be adjudicated in two gigantic joint sessions. With this, CADE hopes to obtain a clearer picture of the combined market concentration in their respective sectors in order to judge the need to impse limitaton on the deals in question.

Anhanguera, the largest private post-secondary in Latin America, has acquired a number of Brazilian colleges and universities in recent years. Its purchase of Uniban for R$ 510 million, In September 2011, presents CADE with a significant challenge. CADE councilmembers will have to identify which colleges compete with those acquired by Anhanguera. Free market competition can be gauged from the types of course offered, as well as according to the muncipalities and states where they are located. If analysts were to verify market demand, for example, on a state-by-state basis, Anhamguera could be permitted to built universities where these are lacking, such as the state of Bahia.

In regions where a number of educational companies have already been in M&A deals — especially in the South and Southwest — CADE will take a harder look. In these areas, CADE official could debate the difference between expensive colleges and popular ones in order to find that one does not compete with the other.

Qualicorp acquired significant assets in the form of health plans and benefits in recent years, including the May 2012 acquisition of Aliança for R$ 100 million. Cade has taken a wider view of the deal, verifying the impact of Qualicorp’s series of deals before pronouncing. Also in the medical sector, the sale of Amil to DASA will also be treated with due rigor. The same goes for the sale of five Brasília-area hospitals to Rede D’Or. In this case, CADE will determine whether the local market is too concentrated and what the impact on end users will be.

When Portugal Telecom pulled out of Vivo only to join with Telefônica immediately thereafter, is considered one of the most difficult faced by CADE this year. The proceedings endedup on the “yellow list” of cases requiring attention not only because of its impact on consumers but also owing to a recent determination of CADE itself. In April, CADE approved the Telefônica-TIM merger, betting on the power of Portugal Telecom as a shareholder in Vivo.

At the time, the council ruled that the participation of the Portuguese would provide a counterweight to the exclusive control over Vivo held by the Spaniards. The risk that is now being debated internally by CADE is that Portugal Telecom will pull out, enabling industry players to coordinate their strategies based on the market share of Telefônica, which has already taken a stake in two companies with which it should be competing, TIM and Vivo.

In the sale of a stake in Usiminas to CSN, sources inside CADE say the analysis will be a rigorous one, given that the two companies compete in various markets and jointly produce 79% of steel plate production in Brazil.

CSN had acquired 20.14% of the preferred shares and 11.66% of the ordinary shares of Usiminas until last year, when CADE prohibited it from making new acquisitions and levied a R$ 10 million fine should CSN defy the order.

CADE expects that CSN will acquire CSA, creating even greater concentration in this market sector. If a CSA-CSN deal goes through, CSN will only be able to join CSA with the prior consent by CADE.

But the really significant case this year will be the creation of Globex. Negotiated in December 2009, the deal is considered a difficult one by CADE officials. Unlike other cases in which CADE contemplates the sale of factories, brands and products in order to even the playing field, the companies party to the Globex deal all own retail stores and brand names.

The sale of store locations is a difficult demand for a regulator to make because it requires an exhaustive evaluation of all points of sale in Brazil. It will be up to CADE to define the extent of influence of each of hundreds of Globex stores in order to verify where competition is present and where it is lacking.

In the hearing on the case, CADE members will be called upon to rule as to whether the major supermarket chains, such as Carrefour and Walmart, will compete with Globex and help keep prices low.

The fact that Globex uses the Internet to sell to the consumer might also work in favor of the deal, indicating as it does that competition involves more than mere brick and mortar supermarkets and retail outlets. In the Globex case, however, most of its products are whiteline household appliances, in which the customer is still much more likely to visit a store before deciding on a purchase.

No doubt the Globex application will be approved with restrictions. CADE councilmembers are aware that when consumers have problems after CADE okays a deal, CADE will take the blame for this fiasco.

Rule Changes

This is a little technical for a neophyte in the field, so consider this a first draft.

  1. Introduction of prior examination [of acts of concentration]
  2. Simplification of concentration act submissions
  3. Eliminates possibility that requests for review will unduly delay proceedings
  4. Broadens the mandate of council members, introducing a two-year mandate for the Superintendent General and increasing the autonomy of the agency
  5. Reinforces the leniency rules
  6. Makes it possible for the superintendent to filter the most important applications and acts of concentration in order to free up the hearing calendar
  7. Stricter conditions on the submission of acts of concentration, calling for a second ceiling of  R$ 30 million in revenues and eliminating the subjective criterion of 20% of the relevant market
  8. Hiring 200 managers for CADE and SEAE, supplying the human resources necessary to their respective missions.   de forma a dotar os órgãos dos recursos humanos necessários às suas respectivas missões.