Jan. 31 (Bloomberg) -- Distribucion y Servicio D&S SA, Chile's biggest supermarket chain operator, fell the most in nine years in Santiago after antitrust authorities rejected its planned $4.2 billion takeover by SACI Falabella SA.

The purchase would reduce competition in the market, increasing prices and lowering the quality of products for consumers, the antitrust authority known as TDLC wrote in a statement published today on its Web site.

The decision ``was unexpected by the market,'' Alvaro Pereyra, head of research at BCI Corredores de Bolsa in Santiago, said by telephone. ``A combined company was expected to generate cost savings.''

The takeover probably would have created $1.4 billion in ``synergies,'' brokerage Inversiones Security wrote in a report yesterday. In announcing the agreement in May, Falabella said the deal would help accelerate its international expansion plans, tapping consumer demand in Peru, Argentina and Colombia.

Falabella had agreed to exchange 0.11 share for each share of D&S. Based on yesterday's closing price that values the deal at about $4.2 billion, according to Bloomberg calculations.

D&S plunged 19 percent to 224.8 pesos in Santiago, its steepest fall since December 1998 and erasing its gain for the year. Falabella slid 5.5 percent to 2,550 pesos.

Tough Stance

The takeover would create an ``enormous change in the market's structure, creating a company that would be a dominant actor in integrated retail and in practically all of its segments,'' the antitrust authority wrote.

The ruling shows that regulators are taking a tough stance against retail consolidation to protect consumers from a decline in competition, Itau Corretora analyst Ricardo Fernandez said.

``It's a bad sign for the retailing environment in Chile,'' Fernandez said in a telephone interview today.

Falabella probably will take the case to Chile's Supreme Court, analysts including IM Trust's Vicente Bertrand said. Falabella Chief Executive Juan Benavides wasn't available for comment, his assistant said by phone. The company said in a regulatory filing that its lawyers are reviewing the ruling and possible actions.

A combined D&S and Falabella would overtake the Paulmann family's Cencosud SA as Chile's biggest retailer. Falabella investors would own 77 percent of the company.

Falabella owns its namesake department stores and the Sodimac home-improvement chain. D&S owns the Lider and Ekono supermarket chains.

The rejection is good for Falabella because the savings of buying D&S wouldn't compensate for the cost of absorbing a company with problems managing an expansion in the last few years, said Itau's Fernandez.

``I know I am different because most people believed this merger would make Falabella a bigger company with expertise in supermarkets,'' said Fernandez, who has a ``sell'' rating on Falabella. ``I think it would have given them a lot of headaches.''

To contact the reporter on this story: James Attwood in Santiago at jattwood3@bloomberg.net; Heather Walsh in Santiago at hlwalsh@bloomberg.net.

Last Updated: January 31, 2008 16:53 EST