Brazil recently celebrated the fifth anniversary of Law 12.529/2011 (Brazilian Antitrust Law), which established a pre-merger control system and aligned the Brazilian Antitrust Authority (Cade) with more mature jurisdictions.
The Brazilian M&A market reacted accordingly, with a quick shift in the culture of allocating antitrust risks. Indeed, a pre-merger system makes room for negotiations with Cade in the process of seeking antitrust remedies. This could be a long and burdensome experience, and incentives for the parties to drop or consummate the deal may vary depending on the level of antitrust exposure and contractual enforcement.
Therefore, the allocation of antitrust risk has become an important trend in Brazilian M&A agreements, with a particular focus on termination fees for strategic deals – those where there is a high likelihood that the buyer will be unable to close as part of an antitrust decision/restriction.
Such contractual provisions, also known as reverse break-up fees, which typically range from between four and six percent of the deal price, aim at incentivising the buyer to find and negotiate antitrust remedies to clear the transaction. It also financially compensates the seller, in cases where the transaction is rejected, since the target may experience pre-closing losses during the antitrust assessment.
The recent recession in Brazil also boosted this trend, with many consolidation processes in different industries. Not surprisingly, Cade has blocked four transactions over the past 12 months: (i) the Ultrapar proposed acquisition of rival fuel distribution company Alesat; (ii) the purchase of meatpacker Mataboi by JBJ, (iii) the acquisition of education company Estacio by Kroton Educacional; and, more recently, (iv) Ultrapar's proposal to buy distributor Liquigas from Petrobras.
Although the Ultraplar/Alesat transaction did not contemplate a termination fee, Petrobras required from Ultrapar, according to public information, a reverse break-up fee of BRL280 million ($86 million) in case of an antitrust rejection in the Liquigas deal. The fee represented 10% of the total purchase price, close to the one negotiated in the groundbreaking US AT&T/T-Mobile transaction.
The imposition of such a high fee could be explained by the fact that Liquigas' sale was part of a competitive auction with many players disputing the asset. Although Ultrapar offered the highest purchase price, it was clearly the proposal bringing more antitrust exposure, as the leading player within the sector. After a fierce battle of almost one year with Cade, and despite offering divestures to avoid the payment of the fee, the authority rejected the transaction since it would increase the abuse of market power in the affected market – also noting that potential remedies offered were insufficient to decrease concerns.
Lesson to learn: reverse break-up fees are a good way both to ensure that the buyer is sure about the deal and financially to protect the seller in case of a rejection. An advance risk assessment, though, is key for the parties to better allocate risks arising from this type of provision.
|Ricardo Lara Gaillard||Clovis Lores||Victor Couto|
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