CADE approves ALL/Rumo deal with restrictions
The Administrative Council for Economic Defense - CADE, approved on 12 February 2015 the acquisition of America Latina Logística – ALL by Rumo Logística a Operadora Multimodal S/A. The approval of the merger (file no. 08700.005719/2014-65) was conditioned to the implementation of a series of measures imposed by a Merger Control Agreement (ACC for its acronym in Portuguese).
Rumo is in the multimodal logistics services market for sugar exports in the Port of Santos, offering solutions of transport, storing and ship loading. The company is part of Grupo Cosan, which is a producer and distributor of sugar and ethanol for national and international markets, among other activities. ALL has railroad concessions in the states of São Paulo, Paraná, Santa Catarina, Rio Grande do Sul, Mato Grosso and Mato Grosso do Sul. The total area of these concessions corresponds to 80% of the Brazilian GDP and its railroads network serves four of the major ports in Brazil, enabling the flow of a considerable part of different agricultural commodities.
With the transaction, Grupo Cosan will be the major indirect stockholder of ALL. The new company, in addition to being controlled by a major player that uses the railroad to its own transportation of sugar and fuel, will control the entire export supply chain of vegetable bulk through the Port of Santos.
According to Reporting Commissioner Gilvandro Araújo, although with possible beneficial effects in terms of increasing the capacity of the railroad and service offering, the merger has the potential to stimulate market foreclosure, facilitate access to competitors’ privileged information, and favor tie-in sales. For example, it can benefit the access to the railroads to clients that hire logistics services of Rumo instead of its competitors.
The acquisition of shares of ALL by Rumo could also encourage the adoption of discrimination strategies by the new company due to its dominant position resulting from the merger. The merged company could negotiate better conditions with the ones from its own corporate group to the disadvantage of competitors in different markets.
On the other hand, the Commissioner considered as beneficial the investment programme introduced by the buyer.
"The best option for the case is the application of mechanisms that, at the same time, will safeguard the efficiencies resulting from eventual implementation of the announced investment plan and, simultaneously, create a disincentive structure to anticompetitive conducts by the new company. Therefore, the measures adopted should be structured based on three complementary logics: transparency, guaranteed access and equality”, said the Reporting Commissioner.
Remedies – The ACC signed between the companies and CADE foresees a series of measures that aim to move away possible anticompetitive conducts by the new company. The agreement reaches all the services to be provided by the group, including rail transport, transshipment, storage, and ship loading.
To reduce the possibility of market foreclosure, the new company must guarantee access by Rumo’s competitors to its terminals in the Port of Santos. It must also offer long-term contracts to the railway users that commit to the volume of cargo transportation.
As a mechanism to discourage discrimination, the ACC establishes the obligation to meet objective parameters for pricing the services provided to competitors. The parties should fix variables and its scale of importance, since both will be used when deciding prices for its services.
“Once the variables are fully fixed, it will be possible to decompose any charged price. This would allow the objective identification of each user’s peculiarities that would justify a differentiated treatment and their quantification and qualification, in order to measure if the differentiation is reasonable. Thus, any discriminatory treatment will be inevitably highlighted”, explained Gilvandro Araújo.
One other important measure adopted to avoid discriminatory actions was to limit the use of logistical assets by companies related to the controlling group. Maximum percentages of usage, equivalent to the current volume loaded by these companies, were established. This aims to stimulate the investment in the railway, since if Cosan group will have to enlarge the overall railway capacity if it wants to expand its use. Therefore, it would benefit all users.
To prevent an uneven service provision to competitors, an online dashboard will be created and it will present to each of them information such as complete real-time data regarding the service provided to it, average service time to the other users of that specific sector, and average service time of the Cosan Group company with which it competes.
In regards to the possibility of tie-in sales, the agreement foresees the total separation of the contracts for the provision of each service by the new company. The choice for the contract type for a service, being it single of combined with others, will be left to the user’s discretion. The price of a logistical services package cannot be inferior to the price of a single service included in it. Potential offered discounts should be previously fixed at the time services are hired. The discounts must also be subjected to equal and objective criteria.
Furthermore, if a user feels discriminated, it will be able to formally report to the supervisor and it must receive a reasoned reply as foreseen by the ACC. The supervisor, a job position to be created by the company, will be responsible for assuring the equal service provision. He/she will commit to report to CADE, being subjected to fines from BRL 50,000 to BRL 1 million if the agreed commitments are not fulfilled.
On the possibility of sharing sensible commercial information of the competitors, the ACC prohibits board positions in the new company and in companies of the Cosan Group to be occupied by the same person.