Brazil Rejects Carrefour-Pao de Acucar Deal

A proposal backed by Carrefour SA (CA) to merge its Brazilian assets with Cia. Brasileira de Distribuicao Grupo Pao de Acucar fell through as Brazil’s government withdrew financial support for the deal, which was opposed by Pao de Acucar’s largest shareholder.

Brazil’s national development bank, known as BNDES, rejected a plan to help fund the transaction with a 2 billion- euro ($2.8 billion) stake purchase in the proposed new company, saying agreement from all parties was a condition for its participation, according to an e-mailed statement yesterday.

Casino Guichard-Perrachon SA (CO), the Saint Etienne, France- based company that shares control of Pao de Acucar with Brazil’s Diniz family and competes with Carrefour, released a statement after a board meeting in Paris yesterday saying the proposed merger “grossly” overestimated cost savings, had high execution risks and would reduce Pao de Acucar’s earnings per share.

“Reason prevailed,” Carlos Lessa, who served as BNDES president from 2003 to 2004, said in a phone interview from Rio de Janeiro yesterday. “It doesn’t seem smart to create a company with a French partner like Carrefour, which is having thousands of problems.”

Pao de Acucar fell 2 percent to close at 65 reais yesterday before the announcement that the deal was off, while Brazil’s benchmark Bovespa index lost 0.9 percent. Shares in the retailer, Brazil’s largest, rose 13 percent on June 28, when the merger proposal was announced. Carrefour fell 2.7 percent to 21.99 euros yesterday in Paris, while Casino advanced 0.14 percent to 63.49 euros.

Carrefour vs. Casino

The merger plan was proposed to Carrefour last month by Gama, an investment fund unit of Banco BTG Pactual, a Brazilian investment bank, setting up a power struggle with Casino.

Casino said the proposal was illegal because it violates a 2005 shareholders’ agreement that gives it the option to buy control of Pao de Acucar next year. Casino responded by raising its stake in Pao de Acucar to 43.1 percent last week.

Pao de Acucar Chairman Abilio Diniz and Casino control Brazil’s largest retailer through Wilkes, a joint venture. Casino, which has filed two requests for arbitration at the International Chamber of Commerce, said yesterday that Chairman Jean-Charles Naouri would defend the French company’s position “by all appropriate measures.”

The rejection by Casino prompted BTG Pactual to “temporarily suspend the proposal,” it said in an e-mailed statement yesterday.

Peninsula Participacoes, the Diniz family’s holding company, reaffirmed its support for the proposed merger and said Casino’s board didn’t carefully analyze all aspects of the proposal.

“Casino’s unilateral decision is lamentable,” the company said in an e-mailed statement yesterday.

It wouldn’t be feasible to continue to pursue the merger under current circumstances, Peninsula said in the statement.