Spotlight: merger review in Brazil

1 Spotlight: merger review in Brazil

All questions

Merger review

In the second year of the covid-19 pandemic, CADE continued to improve its merger review performance. In 2021, CADE analysed a record 611 mergers28 – an incredible 34.6 per cent increase on the previous record, the 454 mergers analysed in 2020.

According to CADE’s official figures:

  1. of the total mergers assessed, 527 (86.3 per cent) were analysed under the fast-track procedure and 84 under the ordinary procedure;
  2. 585 mergers (95.7 per cent) were approved without restrictions and only six were approved subject to remedies;
  3. from January to October, the average assessment period was 32.5 days29 (19.8 days for fast-track cases and 112.2 days for ordinary cases); and
  4. the two months with the most cases were August (75) and December (76).

i Significant cases

In 2021, CADE reviewed significant cases involving several markets, including six mergers approved subject to remedies.

In February, CADE approved without restrictions a joint venture between Latam Airlines Group, which operates mainly in the passenger and cargo air transport markets, and Delta Airlines, an American company that provides air transport services for passengers and cargo.30 The transaction allowed both companies to operate passenger and cargo air transport services on routes between the United States, Canada and countries in South America. The SG approved the transaction without restrictions, which was also the position adopted in the Administrative Tribunal’s decision.

In April, the Administrative Tribunal approved the acquisition of Hub Pagamentos by the Magalu Group, a major multichannel retail company.31 According to Magalu, the acquisition of Hub Pagamentos aimed at offering a complete portfolio of banking services through Magalu’s app. The SG approved the transaction without restrictions. However, the Mercado Livre group (a competitor in the e-commerce market) appealed the decision, arguing that this was a data-driven merger and, therefore, Magalu was actually acquiring competitors’ data owned by Hub Pagamentos (the company had supply agreements with several of Magalu’s competitors). The Administrative Tribunal upheld the SG’s decision, stating there was no evidence that Mercado Livre’s data would be used in markets in which Magalu competed with Mercado Livre; the transaction did not create nor increase any dominant position; it did not raise any entry barriers; it did not reduce competition; and it did not increase the probability of market foreclosure.

In May, CADE approved the acquisition of Eaton’s hydraulic business by Danfoss.32 Danfoss is a company that manufactures components for off-road mobile machinery and Eaton Hydraulics is involved in the production and sale of hydraulic components for industrial and mobile equipment. The transaction was approved subject to behavioural and structural remedies.

Since the transaction was subject to antitrust approval in the United States, the European Union, Ukraine, Egypt, China, South Korea, Mexico, Australia and Turkey, CADE engaged in dialogue with the applicants and several other antitrust authorities to establish a single remedy package to address antitrust concerns in all jurisdictions. The remedy package included the establishment of a stand-alone business unit with several of Danfoss’ and Eaton’s product lines (named White Drive Motors & Steering), which would immediately be sold by Danfoss to a purchaser approved by CADE.

Another operation also approved subject to remedies was the sale of Petrobras’ stake in the Gemini GásLocal liquefied natural gas (LNG) company to White Martins.33 Petrobras committed to leave the Gemini Consortium, a joint venture formed by White Martins and Gemini GásLocal that aims to produce and market LNG in Brazil.

The structure of the Gemini Consortium has raised competition concerns with CADE for a number of years and has been the subject of proceedings investigating discriminatory treatment of competitors and market foreclosure related to the joint venture arrangement. The approval of the transaction reduces but does not entirely eliminate possible incentives for anticompetitive conduct that may be committed by Petrobras.

In June, CADE approved the acquisition of the cloud-based tech company Linx by the Stone Group, which provides payment services and technological infrastructure for capturing, transmitting and processing data and settling transactions.34 The transaction was originally approved by the SG, but Stone’s competitors Adyen, Safra and Cielo appealed the decision. The appellants argued that (1) Lynx has a dominant position that could be used by Stone to foreclose the market; and (2) Lynx provided relevant services to several of Stones’ competitors, allowing Stone access to sensitive data. The Administrative Tribunal approved the transaction, stating that there was no risk of market foreclosure and that the competitors’ data owned by Lynx was actually public and could be gathered by other competitors.

In November, the SG issued an opinion recommending that the acquisition of Oi Group’s mobile telephone assets by competing operators TIM, Claro and Telefonica35 be approved subject to remedies. The SG stated that the transaction would reduce the number of major participants in this market from four to three, increasing the risk of market foreclosure. The authority proposed behavioural remedies that could mitigate the risk, such as radio access network sharing agreements, obligations to rent spectrum in several municipalities, obligations to facilitate the operations of mobile virtual network operators, and obligations related to roaming access, etc. The Administrative Tribunal is expected to decide on this case in 2022 and may (or may not) follow the SG’s recommendation.

In December, CADE authorised SAS Shipping Services SARL (SAS) to exercise certain controlling rights in Log-In Logística Intermodal (Log-In)36 while the acquisition of Log-In is being assessed by the authority. The CADE commissioners unanimously decided to grant the SAS request to exercise some corporate control over Log-In subject to certain conditions, until the Tribunal makes a final decision on the transaction or issues a decision revoking the authorisation granted.

Because of CADE’s decision, SAS may immediately appoint a new member to the board of directors of Log-In. In this case, for the appointment to be valid, SAS must inform CADE of the names of at least three possible directors who must meet the criteria established in advance. Among other obligations, the appointed director must execute a term agreement with CADE before taking office.

CADE also granted SAS convening and voting rights in general meetings. These meetings are to be convened to discuss matters that may change the regular course of Log-In’s business or directly and negatively affect the value of SAS’ investment. However, SAS voting rights on the Log-In board of directors are limited to specific cases, such as: the appointment, removal or replacement of a member of the board of directors; specific amendments to the articles of incorporation; and ratification or amendments to the compensation plan based on the actions of Log-In that could result in share dilution.

In the Administrative Tribunal’s final meeting of 2021, the agency also cleared the Localiza acquisition of Unidas, subject to remedies.37 Localiza and Unidas are the two biggest car rental companies in Brazil. According to the reporting commissioner on the case, as a result of the transaction, only one other company would be able to compete nationwide with the merged entity and, therefore, the transaction was likely to result in abuse of economic power in the car rental market, with significant risks
to competition in this sector.

To mitigate these concerns, the parties and CADE reached an agreement that provides behavioural and structural remedies. The merged entity must sell the Unidas brand and part of the Unidas branch network, stores, systems and operational fleet. As to the behavioural remedies, the parties agreed (1) to make no new acquisitions in the car rental market for the next three years; (2) to submit for approval by the authority any transactions made in this segment in the fourth and fifth years after closing; and (3) not to enforce the non-compete clause provided in an agreement signed in 2020 with Vanguard Car Rental (owner of the Alamo, Enterprise and National brands).

ii Trends, developments and strategies

The trends in merger review in 2021 were as follows.

The SG’s merger review efficiency has continued to improve significantly in recent years. The authority managed to assess 157 more cases than it did in 2020, with little impact on the average length of the period of analysis.

Increasingly, there seem to be disagreements between Administrative Tribunal commissioners. On a few occasions in 2021, the Commissioners publicly stated their dissatisfaction with one another. This situation increases the unpredictability of their decisions.

There also seems to be an increasing divergence of opinion between the SG and the current composition of the Tribunal. Some commissioners have indicated that they may be willing to overturn long-established jurisprudence. As a result, there has been an increase both in the number of cases raised by the Tribunal and in the number of split decisions.

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