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Cade blocks Liquigás’ acquisition by Ultragaz

Merger

The Majority of the Tribunal considered that the transaction could be negative for the consumers
by Assessoria de Comunicação Social published: Mar 01, 2018 02:08 PM last modified: Mar 01, 2018 02:08 PM

On the judgment session of 28 February, the Tribunal of the Administrative Council for Economic Defense (CADE) blocked the acquisition of Liquigás by Ultragaz. The majority of the commissioners followed the vote presented by the reporting commissioner, Cristiane Alkmin Junqueira Schmidt, who identified risks of negative impacts on consumers.

According to CADE’s opinion, the purchase of Liquigás would increase the possibility for Ultragaz to exercise the abuse of market power in the Liquefied-Petroleum Gas (LPG) market. In August 2017, Cade´s General Superintendence opinion had already highlighted that the transaction could result in a high concentration level. The merger would eliminate a strong competitor in a market where only four companies hold more than 85% of the supply market share.

Ultragaz and Liquigás have, respectively, the largest and second largest domestic market share of LPG. In a post-merger scenario, the new company would hold more than 40% of sales in many of the Brazilian States, as indicated by the data presented by the reporting commissioner.

Mrs. Cristiane Alkmin emphasized in her vote some aggravating factors to the increase of the concentration level: the existence of significant entry barriers and the lack of effective competition among the companies. Therefore, the 'New Ultragaz' could "exercise unilateral market power after the transaction," she said. In addition, Alkmin argued that "because of the low dynamism and the low elasticity of the demand, there are incentives for collusive behavior in order to raise prices."

Regarding the efficiencies that could be engendered after the transaction, the reporting commissioner concluded that "they were very fragile, not specifically linked to the transaction and not likely to be transferred to the final consumers. Therefore, the net effect on society - particularly on the consumers - would be negative. "

In the analysis of the remedies proposed by the companies – there were three proposals -, the majority of the Tribunal agreed with the opinions issued by Cade´s General Superintendence and the Department of Economic Studies that stated that "the remedies presented are not adequate to avoid price increases in many of the Brazilian States."

In his vote, Cade´s president, Mr. Alexandre Barreto, argued that "it is expected that the largest companies test the limits set by Cade's jurisprudence, regardless of whether these limits are more or less strict, in order to take advantage of investment opportunities." "Hence, even though the block of a merger is an exceptional measure, it can always occur. The present case fits this hypothesis, despite the great effort made by the parties involved. The companies legitimately tested this limit, but it was not possible to find remedies that would meet both private and social interests", he concluded.

Commissioners Maurício Oscar Bandeira Maia and Polyanna Ferreira Silva Vilanova diverged from the reporting commissioner’s opinion and voted for the approval of the merger, conditioned to the signature of a Merger Control Agreement.