Brazil's Breweries: The More Mergers The Merrier?

That may be the signal as a big deal nears approval

For weeks, Brazilian business circles have been transfixed by the battle of the brewers. The country's No. 3 beermaker, Cervejarias Kaiser, is trying to prevent Brazil's top two beer makers--Cervejaria Brahma and Antarctica Paulista--from merging to form AmBev, a powerful new company that would control 72% of the market. Kaiser maintains the merger will lead to higher beer prices and layoffs. AmBev retorts that Coca-Cola Co., which owns 10.3% of Kaiser and competes against soft drinks made by Brahma and Antarctica, is just trying to block a deal that's important for Brazil Inc.

What's at stake is far more than a few kegs of suds. Behind the headline-grabbing tussle is a bigger controversy that could potentially change the face of Brazilian business: Should the government promote rough-and- tumble competition, or should it favor the creation of big national companies that can conquer new markets in the region and hold foreign competitors at bay at home? Brazil's Economic Defense Council (CADE), the antitrust agency, is widely expected to approve the AmBev merger. And even if CADE imposes conditions such as requiring AmBev to sell one of its brands, the decision will send a clear signal to other Brazilian companies seeking to gain heft by acquiring their local rivals.

ENDANGERED SPECIES? Indeed, President Fernando Henrique Cardoso seems to be behind the idea of creating Brazilian national champions. A onetime socialist who probably would have nixed a merger such as AmBev a few years ago, Cardoso now speaks about the need for "more Brazilian multinationals." One reason is that U.S. and European corporate titans from BellSouth Corp. to Carrefour have descended on the country in recent years, snapping up scores of local companies and relegating others to the status of also-rans.

The flood of foreign direct investment, totaling $56 billion in the past two years alone, has helped to stabilize a listing economy. But it has also raised fears that Brazilian-owned business is fast headed for the endangered species list. "I don't think there will be more than four to six players per industry [in the world] 5 or 10 years from now," says Marcel H. Telles, chief executive officer of Brahma and future co-CEO of AmBev. "If we merge, we would be one of them. If not, I don't see how."

Beer is not the only Brazilian industry that stands to gain from consolidation. For example, a merger of Brazil's top two steel producers, Companhia Siderurgica Nacional and Usiminas, could result in a formidable global company, says Mauricio Reveco, steel analyst with Salomon Smith Barney in New York. On their own, they and other Brazilian steelmakers are tempting targets for a foreign takeover. "Economies of scale are very important in this industry," says Reveco. Although CSN and Usiminas are not known to be in talks, analysts such as Reveco say that a big merger like that is definitely needed if Brazilian steel companies are to become more competitive abroad.

DOWNSIDE. Brazil might also be better off if it had fewer airlines. If Varig, the flag carrier, were to join forces with one of its three lesser rivals--TAM, Transbrasil, or Vasp--the airline would have a better shot at recouping the market share it has lost to U.S. heavyweights such as American Airlines Inc. and United Airlines Inc. For example, Brazilian carriers' share of routes to the U.S. is down to 48%, from 57% five years ago. In banking, Brazilian banks Bradesco, Itau, and Unibanco remain leaders, but they face increasing competition from the likes of HSBC and Spaniards Banco Santander Central Hispano and Banco Bilbao Vizcaya Argentaria. A merger of two of the larger Brazilian institutions would deal a major blow to foreign competitors.

But big mergers can have a downside. Diminished competition could result in higher prices for consumers as well as layoffs for redundant workers. Kaiser President Humberto Pandolpho also says that AmBev could become a buyout target for a foreign brewer, which would defeat the point of creating a national powerhouse.

CADE is expected to rule on the AmBev merger by April. Approval of the deal is considered likely, if only because Brazilian authorities are aware that the U.S. and Europe are already in the grip of merger mania. So if the AmBev deal goes through, watch for some more corporate marriages that are strictly local affairs.

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