Brazil forces Brasil Foods to sell assets, brands

BRASILIA,  (Reuters) – Brazilian antitrust  regulators gave their support yesterday to a deal that saves  the merger that created processed foods company Brasil Foods.

Antitrust watchdog Cade endorsed a plan by which Brasil  Foods SA will sell 80 percent of flagship brand Perdigao’s  production capacity and halts the sale of some of its 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 markets.

The company’s shares posted their biggest gain in more than  two years after the Cade’s decision.

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  radically changed its initial stance,” Cade board member  Ricardo Ruiz said as he presented the agreement to his fellow  regulators.

The disposal of about 3 billion reais worth of assets and  minor brands might cost Brasil Foods about 13 percent of  revenue, said Chief Executive Officer Jose Antonio Fay.  Analysts estimate that could be equivalent to about 8 percent  of operational earnings as measured by EBITDA, or earnings  before interest, taxes, depreciation and amortization.

“The sacrifices stemming from the asset and brand sales are  way smaller than the gain of having that merger approved,” said  Bruno Wittmaack, who helps oversee 1.2 billion reais ($761  million) at Sao Paulo-based investment fund Victoire Capital.  “Everyone sighed in relief after that ballot.”

The company’s shares rose 9.8 percent to 28.55 reais after  gaining as much as 12.1 percent earlier in the day. The  U.S.-traded shares rallied 9.9 percent to $18.50.

The asset sales “won’t hamper our operation,” Fay said in a  news conference. “But we will only be able to complete the  process next year, nothing will happen in 2011.”

Yet consumer groups and antitrust lawyers said Cade’s  approval of the merger is a blow to corporate governance  standards in Brazil, Latin America’s largest economy, because  the restrictions will hardly weigh on the company’s pricing  power.

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.

The $5.4 billion combination was the biggest in any  emerging market nation in 2009, according to Thomson Reuters  data.

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