Brasil Foods Slumps Most in Six Months As Regulator Urges Blocking Merger

Brasil Foods SA (BRFS3), the world’s largest poultry exporter, fell to the lowest in more than six months after Brazil’s antitrust authority said the $3.8 billion merger should be blocked as it wields too much market share.

Brasil Foods, created about two years ago after Perdigao SA’s acquisition of Sadia SA, declined 1.59 reais, or 6.1 percent, to 24.56 reais at 10:31 a.m. in Sao Paulo trading, the lowest since Nov. 29, 2010. The stock earlier declined 7 percent, after yesterday falling as much as 7.7 percent.

The Sao Paulo-based company can boost prices without losing customers, Carlos Ragazzo, one of five antitrust commissioners, who analyzed the case and recommended the agency reject the two- year old deal, said yesterday. A second commissioner voted to block the merger, before the session was postponed for a week.

“The recommendation is worse than expected,” Gabriel Vaz de Lima and Luis Miranda, analysts with Banco Santander SA, in Sao Paulo and Mexico City, said today in a report to investors. “We no longer have visibility on the outcome.”

Brasil Foods was downgraded today to “underperform” from “market perform” by Raymond James equity analyst Daniela Bretthauer. The stock was also cut to “neutral” from “buy” by Banco BTG Pactual’s equity analyst Fabio Monteiro.

Brazil’s antitrust agency, known as Cade, will make a final decision at its next meeting on June 15 after a request to delay voting was made by member Ricardo Ruiz. In Brazil, regulators can reject a merger or force changes to it even after the companies have already combined operations.
Damage to Market

“Seldom does one find in antitrust analysis a transaction in which the likelihood of damage to the market and consumers is so evident,” Ragazzo said in Brasilia while arguing against the deal. “The proposed act is a textbook case as an example of a transaction that is impossible to be approved.”

The company is still “optimistic” it can negotiate a solution with the regulator, Wilson Mello, vice president of institutional relations at Brasil Foods, told reporters yesterday in Brasilia after the hearing. In a separate statement, the company said the postponement of the ruling was ”positive” as it gives officials more time to review the case.

“The approval without restrictions is off the table, no doubt,” Rafael Cintra, an analyst with Link Investimentos, said yesterday in a telephone interview from Sao Paulo. “The report was pretty gloomy and will weigh on the shares.”
Bigger Rival

Perdigao bought Sadia in 2009 after its bigger rival booked more than 3 billion reais ($1.9 billion) in wrong-way currency bets as the real declined after the collapse of Lehman Brothers Holding Inc. The producer of meat and dairy products, margarine, and frozen pizza had sales of 22.7 billion reais in 2010.

Brazil accounts for about 60 percent of the company’s sales and the remainder is shipped to 140 countries and sold under brands including Sadia, Perdigao and Perdix.

The company is controlled by Previ and Petros, the pension funds for employees in Banco do Brasil SA and state-controlled oil producer Petroleo Brasileiro SA (PETR4), which own 12.7 percent and 10 percent of the company. It has 41 distribution centers and 60 plants in Brazil, one in Argentina, two in Europe and employs 113,000, according to the company’s website. It owns 45 brands.
Allow Competition

Brasil Foods must allow competition by a third company and may also have to share gains from the deal with customers, according to a May 10 report by Gilvandro Vasconcelos Coelho de Araujo, general attorney of Brazil’s antitrust agency.

Brasil Foods said May 13 that first-quarter profit rose more than sixfold as demand for processed food and chicken exports offset increased commodities costs.

Net income increased to 383 million reais from 61 million reais in the year-earlier period, the company said. Revenue climbed 19 percent to 6.1 billion reais.

Operating profit was boosted by increased demand for foods including chicken, Brasil Foods said. Tyson Foods Inc., the biggest U.S. meat processor, also reported chicken sales rose as more expensive beef and pork boosted poultry demand. Brasil Food’s chicken exports gained 11 percent in the quarter.