The announcement that Brazil’s competition watchdog had given its blessing to the merger that formed Brasil Foods eased ongoing shareholder concerns that the 2009 deal would not in fact be approved. However, while the transaction was approved, conditions have been placed on Brasil Foods’ operations. What will this mean for company? Petah Marian reports.

Brasil Foods shareholders breathed a sigh of relief last week as Brazil’s antitrust regulators confirmed they would support the 2009 merger that set out to create the country’s largest food company.

Speaking on Thursday (14 July), CFO Leopoldo Saboya said Brasil Foods was “very glad to have turned the page” with competition watchdog Cade. “Now,” Saboya said, “we can really say that Brasil Foods is really born.”

Executives might be calling Thursday’s decision Brasil Foods’ real birth but the company was formed in 2009 through the merger of Perdigao and Sadia. When the merger was announced, the combined company’s annual revenues of BRL22bn (US$14bn) made it Brazil’s number one food company and the world’s largest poultry producer.

The company has a 9% global market share in the protein production market. In 2010 it sold some 5.7m tonnes of product and reported net sales of BRL22.7bn, with 59.6% sold to the domestic market and 40.4% sold to export.

The creation of the company came out of necessity rather than grand ambitions. Sadia, which attempted to acquire Perdigao in a hostile takeover in 2006, but, two years later, was hit by the global financial crisis. It lost some BRL2.3bn after bets on the continued appreciation of the Brazilan real failed and the company was forced to seek a cash injection. However, its attempts were hampered as the global credit markets dried up.

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By 2009, Perdigao had outgrown Sadia, which returned to the table in a weaker negotiating position and, in May, the two companies announced plans to merge. Under the deal, Perdigao shareholders were set to control 68% of the new enterprise and Sadia was to operate as a 100%-owned subsidiary. 

Despite Sadia’s problems, then Perdigao CEO Nildemar Secches said the companies would create Brasil Foods, which he said would be “one of the largest and most efficient food companies in the world and a “powerful export house”, with exports to over 110 countries.

However, the deal has remained in limbo for the past two years as Cade considered whether the deal would be detrimental to competition. In July 2009, the two companies signed a “reversibility accord” that prevented Perdigao and Sadia from merging distribution and manufacturing operations or exchanging sensitive information.

In May 2010, Saboya, speaking to just-food, admitted it was “not a perfect situation” for the new company but said Brasil Foods’ management was able to run both firms in “an adequate way”.

Nevertheless, as the process dragged out, confidence that the deal would be approved became shaken, particularly after a member of Cade voted against the merger in June.

Cade has now given its blessing the merger, which, on the day the verdict was published, sent Brasil Foods shares soaring. However, the deal does not come without caveats. Brasil Foods must sell 80% of Perdigao’s production facilities and the deal will prevent the company selling some products under the brand for between three and five years. The deal will also lead to Brasil Foods selling some other brands, including the Doriana margarine brand, Delicata, Rezende and Wilson.

Speaking after the announcement, Saboya said that the Cade agreement would see the company lose some 13% of sales and 11.6% of volumes. Of that, some 7.6% will come from disposals and 5.5% will come from the brand suspensions.

Deutsche Bank analyst Jose Yordan said the deal averted a “worst-case outcome” but said the conditions were “restrictive”. Yordan said the restrictions “went beyond our model assumptions”. He expected that Cade would impose disposals of roughly 5% of sales, not the 13% that was agreed, which “should have a small negative impact on our projections and price target”.

Nevertheless, Yordan suggested that Brasil Foods management had “pulled a rabbit out of a hat” and that, overall, the deal is “not a bad outcome”. He insisted that the suspension of the use of the Perdigao brand was “positive” because the disappearance of the brand in these categories, which include processed meats, lasagne, convenience foods and pizzas, will most likely mean additional sales for the Sadia brand rather than for competitor brands.

Elsewhere, JP Morgan analyst Alan Alanis said Cade’s ruling would mean that Brasil Foods could complete the integration of its export business and “with very minor restrictions” integrate its domestic business as well.

Saboya expects Brasil Foods would still be able to capture BRL520m in synergies from the deal, with half of this to be captured this year.

“Internally, now we have to better understand how we can speed up these gains and things related to that and what are the implications of those measures,” Saboya said. “Now we can fully go for structural projects around distribution, production, the plants, that will trigger another area of synergies.”