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Brasil Foods Sinks as Cade Says Should Be Blocked

BRF - Brasil Foods SA, the world’s largest poultry exporter, fell to the lowest in more than six months after a Brazil antitrust commissioner said the $3.8 billion deal should be blocked as it has too much market share.

Brasil Foods, created about two years ago after Perdigao SA’s acquisition of Sadia SA, declined 84 centavos, or 3.2 percent, to 25.31 reais in Sao Paulo trading. The stock earlier declined 7 percent to the lowest since Nov. 23, after yesterday falling as much as 7.7 percent. The drop erased $1.62 billion from Brasil Foods’ market value over two days.

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. The session was postponed for a week.

“Everyone was expecting the merger to be approved and two years later Cade casts this huge shadow,” Fausto Gouveia, who helps manage 250 million reais ($160 million) at Legan Asset Management, said today in a telephone interview from Sao Paulo. “In the best scenario, the deal will be approved, but it will have to sell assets, which means less cash generation.”

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

Final Decision

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.

“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.”

Fernando de Magalhaes Furlan, head of Cade, abstained from voting as he is a cousin of Brasil Foods’s board member Luiz Fernando Furlan. Magalhaes also worked for Sadia between 1995 and 1998, according to information on Cade’s website.

Yields on Brasil Foods bonds due 2020 surged 21 basis points, or 0.21 percentage point, to 6.08 percent at 4:17 p.m. New York time, the most since November, according to data compiled by Bloomberg. Notes due 2017 climbed 13 basis points to 5.56 percent.

‘Still Optimistic’

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 negative vote has raised the probability of an outright rejection of the merger,” Jose Yordan and Rebeca Sanchez Sarmiento, analysts at Deutsche Bank, wrote in a note to clients today. “We do not think that today’s fall marks the bottom for the stock.” They rate Brasil Foods “hold.”

Perdigao bought Sadia in 2009 after its bigger rival booked more than 3 billion reais 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.

Pension Funds

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, 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.

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.

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