Brasil Foods in danger of break-up

The world’s biggest poultry exporter, Brasil Foods, is in danger of being dismantled this week by Brazil’s competition commission in a move that is likely to trigger a radical change to the country’s laws governing mergers and acquisitions.

Antitrust regulators are set to vote on Wednesday whether to block the $3.8bn merger of food processing companies Perdigão and Sadia that created Brasil Foods two years ago.

A key director of Cade, Brazil’s competition board, already voted against the deal last week and the market is now expecting the remaining four commissioners to follow suit, authorising the total breakdown of the frozen foods group that made about R$23bn (US$14bn) in revenues last year.

The merger was rushed through under government pressure in 2009 in an effort to rescue Sadia from financial difficulties and create a national champion.

The deal created a near-monopoly in Brazil, giving the company a large chunk of national poultry product sales and up to a 90 per cent share of the frozen meals market, raising concerns about artificially high prices as the country now battles to rein in inflation.

But regulators’ tough stance on the issue, which shocked investors and wiped $1.6bn off Brasil Foods’ market value in a two-day share plunge last week, will only accelerate plans to change peculiarities of Brazilian law, congressman Carlos Eduardo Cadoca told the Financial Times.

“This just goes to show that the law as it is creates problems, has a negative impact on the economic life and gets in the way of business,” said Mr Cadoca, who first called for a revision of the law after Cade retrospectively blocked a link-up in 2002 between Switzerland’s Nestlé and Brazilian chocolate company Garoto.

The legislation, which competition lawyers said was likely to be given the final go-ahead by the lower house this week, will give Cade four months to make a decision and, crucially, forbid companies from merging until they get prior approval.

Brasil Foods has said it will negotiate with the competition commission.

The company may ultimately have to sell off the Perdigão or Sadia brand, said Henrique Ribas, an analyst at São Paulo’s Planner Corretora.

“Keeping Sadia would be more strategic; it’s more international and it also has an important role in the domestic market,” he said.

According to Barclays analysts, Brasil Foods may instead follow the example of Nestlé and Garoto, which have operated in uncertainty for almost a decade while contesting Cade’s decision in the courts.