Brasil Foods: breaking up is hard to do

Browse the freezer compartments of any supermarket in Brazil and you’ll notice two things. Firstly, Brazilians really like their meat. And secondly, almost everything in there – from burgers to frozen pepperoni pizza – is made by one company: Brasil Foods.

Which is why, in terms of market share alone, the company will have a tough time convincing the country’s competition commission not to block the $3.8bn merger of food processing companies Perdigão and Sadia that created Brasil Foods.

While the merger took place two years ago, thanks to a bizarre twist of the Brazilian legal system, such deals are approved by antitrust regulators only after they’ve actually taken place.

Following months and months of analysis, a key director of Cade, Brazil’s competition board, finally voted against the deal earlier this month. The decision shocked investors and the share price plunged on the assumption that the remaining four commissioners would follow suit.

But the prospect of a settlement before the final deadline of July 13 is now looking more likely. Over the coming days, Brasil Foods is due to make a new proposal to Cade, in which it is likely to offer a range of even more painful concessions such as:

– Selling or suspending smaller brands, such as its margarine lines

– Allowing competitors to operate some of its distribution network

– Putting caps on investment in marketing

– Sharing points of sale

At best, Brasil Foods, which brought in about R$23bn (US$14bn) in revenues last year and is the world’s largest poultry exporter, will be partially dismantled. But it really has no other choice. Some analysts have suggested the company could simply follow in the footsteps of Switzerland’s Nestlé and Brazilian chocolate company Garoto.

Even though Cade blocked a link-up between the two companies in 2002, they have continued to contest the decision in the courts while carrying on as normal, with little damage to Nestlé’s share price. However, for Nestlé, Garoto is just a small Brazilian company which hardly anyone outside the country has heard of.

Meanwhile, for Brasil Foods, the merger of Perdigão and Sadia is at the heart of the company’s very existence and shareholders may not take such a laid back attitude to years of legal wrangling.

Furthermore, Cade is unlikely to give in without seeing Brasil Foods make some big sacrifices. The antitrust agency has been under pressure to prove its credentials after it faced heavy criticism for approving the 1999 merger which created Ambev, Latin America’s biggest beer company.

Impending changes to Brazil’s antitrust laws, whereby mergers will finally be approved before they happen rather than afterwards, could also mean Cade will be less concerned about setting a precedent by blocking the merger and scaring off future deals. After all, Brasil Foods could just be seen as the last unfortunate victim of an antiquated legal system.

With less than three weeks left until the decision, Brasil Foods will have to hope the recipe of concessions it has come up with this time will be enough to satisfy Cade.