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CADE’s General Superintendence concludes opinion about transaction between Kroton and Estácio

Education Market

CADE’s Administrative Tribunal will now analyze the merger
by Assessoria de Comunicação Social published: Feb 08, 2017 11:56 AM last modified: Feb 08, 2017 11:56 AM

The General Superintendence of the Administrative Council of Economic Defense – CADE sent the proceeding related to the acquisition of Estácio Participações S/A by Kroton Educacional S/A (Merger 08700.006185/2016-56) to the analysis of the competition authority’s Administrative Tribunal. The order was published in the Federal Official Gazette on 6 February 2017.

According to the General Superintendence’s opinion, the transaction generates overlap in the distance and on-site undergraduate and graduate courses and in the on-site and distance preparatory courses for civil service exams and for entrance exams for the Brazilian Bar Association (OAB in its acronym in Portuguese). 

The merger generates higher market shares and monopolies, for both on-site and distance courses, in several local markets. The instruction of the proceeding carried by the General Superintendence pointed out that the transaction could raise Kroton’s market power and reduce the level of rivalry in this sector, without presenting efficiencies that compensate the competition concerns.

In addition, it was understood that the education market is characterized by high regulatory barriers, scale and scope economies, and the need for large investments in marketing. These characteristics hinder the entry and the development of effective competitors capable of competing with Kroton.

For the General Superintendence, the acquisition of Estácio removes Kroton’s main competitor from the market – which already is the most important higher education group in number of students in Brazil – and raises the probability of the exercise of market power by the company, which will be much larger than its competitors.

Therefore, the opinion concludes that the transaction has the potential to cause  anticompetitive effects in the higher education market as a whole, both in on-site and distance courses, not limited to the local markets where it has been verified overlap between the parties’ activities, but in all Brazilian territory.

The General Superintendence considered the leadership of both companies in the two categories (on-site and distance) and the similarity of their competitive strategies related to the profile and the movements of organic expansion or through previous acquisitions of both Kroton and Estácio. According to the opinion, the merger may affect the charged prices and reduce the incentives to diversification, improvement of the services quality and innovation in the higher education market.

For this reason, the transaction was challenged and forwarded to CADE’s Tribunal, which is responsible for the final decision – approval, rejection or adoption of remedies to solve identified competition concerns. The Tribunal's decisions may be applied unilaterally or by means of a settlement negotiated with the parties.

The merger was notified on 31 August 2016. CADE has 240 days, extendable for more 90 days, to review and to decide on the case.