August 9, 2017 / 4:30 PM / a year ago

DEALTALK-Tougher Brazil antitrust tack may give IPOs edge over M&A

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By Tatiana Bautzer, Guillermo Parra-Bernal and Leonardo Goy

SAO PAULO/BRASILIA, Aug 9 (Reuters) - Brazil's long-docile antitrust watchdog has shocked executives, lawyers and bankers by rejecting two high-profile planned takeovers in recent weeks, leading cash-starved companies to mull alternatives to mergers including share offerings.

Regulator Cade, which for years rubber-stamped government-backed deals creating "national champions" in industries from meatpacking to pulpmaking, showed its teeth by vetoing takeover plans by for-profit education firm Kroton Educacional SA and fuel distributor and retailer Ultrapar Participações SA.

"Cade has embraced a more aggressive approach to antitrust-sensitive takeovers in a way that we never expected," said a lawyer who advised on one of the deals. "What's risky and scary is that Cade councilors have put that new tack into practice at a couple of very difficult, transformational deals."

If those decisions are a sign of things to come, that could be bad news for a raft of local companies which have put themselves up for sale under pressure from Brazil's harshest recession on record.

An increase in antitrust scrutiny could lead more companies to consider public stock offerings as an alternative to mergers and takeovers, bankers such as Carlos Parizotto of financial advisory firm Cypress Associates said.

"If risks that Cade could block a specific deal skyrocket, shareholders are likely to go to public equity markets," he said.

Already, Brazilian offerings are at a four-year high and M&A activity has been slowing amid stricter legal and regulatory scrutiny beyond the competition realm. With Cade taking a tougher stance, executives and advisors must better gauge what core assets they want from an acquisition and which could be easily sold, merger advisory lawyer Carlos Mello said.

"Clients and dealmakers must now think outside of the box and be strategic about the antitrust consequences of the deals", he said.


In June, Cade thwarted Kroton's plan to buy Estácio Participações SA, saying the proposed remedies were inadequate to stem excess market power. Last week, it blocked the sale of gas station chain Alesat Combustíveis SA to Ultrapar, after Alesat declined to divest assets in 12 Brazilian states prior to the deal.

Cade's acting superintendent Diogo Thomson de Andrade said in an interview that the recession has reduced the interest of some foreign bidders for debt-laden local companies, leaving more to consider tie-ups with domestic competitors.

"More companies are being forced to merge due to the crisis, and deals between major players increase the likelihood of rejection," he told the Reuters Latin American Investment Summit this week.

Cade has classified nine deals as "complex" so far this year, signaling greater scrutiny, compared with eight in all of last year and five in 2015.

Former Cade councilor Olavo Chinaglia told Reuters last week that the agency's staff has learned to weather political and corporate pressure, and feels willing to mete out tougher punishment, if necessary.

Deals facing review include Itaú Unibanco Holding SA's plans to buy Citigroup Inc's Brazilian retail banking assets and a stake in brokerage XP Investimentos SA.


According to Cypress's Parizotto, bidders may begin to targeting assets geographically to avoid too much regional market concentration - which Cade has often cited as a rationale for thwarting pending deals. That would likely help consumers by reducing companies' pricing power.

But it could hurt companies facing looming debt repayments, making it harder for them to dispose of assets or spin them off, bankers noted.

"Listing a company is a slow process," said an investment banker who asked to remain anonymous because his firm is working on several IPOs.

Still, banks expect as many as 15 additional offerings before year-end, including power utility Neoenergia SA's IPO, valued at 35 billion reais, Reuters reported on July 14.

Neoenergia recently won Cade approval for the purchase of smaller rival Elektro Eletricidade & Serviços SA's takeover, and could launch an IPO as early as next month, people said.

$1 = 3.1260 reais Reporting by Tatiana Bauzter, Guillermo Parra-Bernal and Leonardo Goy; Writing by Guillermo Parra-Bernal; Editing by Christian Plumb and David Gregorio

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