Multi-billion merger between Localiza and Unidas faces strong opposition in CADE

RIO DE JANEIRO, BRAZIL – The Administrative Council for Economic Defense (CADE) has already issued 44 notices to companies doing business or competing with the merging car rental companies, requesting input on the effect upon competition of the merger.

The merger between Localiza and Unidas, approved by both companies’ shareholders last November, is facing strong opposition inside the federal antitrust agency.

Although the deadline for submitting arguments to the agency expires only on March 5th, this fact is taken as certain by people close to the operation.

When the transaction was announced, the companies together were worth R$50 billion on the B3 stock exchange, and are now equivalent to R$63 (US$11.6) billion. Everything suggests that investors are not prepared to face this resistance, much less a more dramatic rejection scenario.

The opposition is expected to call for the rejection of the deal rather than the imposition of measures that could mitigate the consequences of the merger. This is a difficult segment for both structural solutions (selling parts of the operation) and behavioral ones (preventing certain practices).

Although apparently simple, the operation is considered by experts in competition law as complex, due to the number of economic sectors affected – and, therefore, the many ways it can impact consumers.

The most obvious sector and the one that will feel the consequences from day 1 is that of app drivers. The estimate is that about half of high frequency drivers use rental cars. Data from the Brazilian Association of Car Rental Companies (ABLA) point out that these total around 200,000 vehicles.

Moreover, hardly anyone knows this, but car rental companies represent 15% of annual car purchases – 13% in the hands of Localiza and Unidas. At Ford, for instance, this market accounted for almost 30% of sales, according to estimates, and they are also a significant share of Renault’s clients.

Together, Localiza and Unidas will hold approximately 70% of the national car rental fleet and close to 75% of the sector’s revenue – excluding companies that manage exclusively outsourced fleets.

On Friday, February 19th, one day after the notice for the case review was published, CADE issued 44 consultation notices to the affected companies.

Vehicle insurance companies are another segment that tends to feel a significant impact. In addition to being contracted by car rental companies that own the vehicles, these companies are also clients, to the extent that they offer reserve cars to policyholders.

There is also an impact on tourism companies and companies that use large outsourced fleets in the provision of their services – such as energy and telecommunications companies, for instance.

Based on the national fleet of rental vehicles, Localiza holds a 55% share of the market, Unidas holds close to 17%, and Movida, approximately 15%.

The rest of the market is spread out over small regional operators – there are more than 10,000 in the sector. “After the merger, there will be a player with 70% of the market, another with 15%, and the rest will be completely scattered,” comments a source close to the deal.

The opposing argument should also involve the fact that the merger will affect consumers with no benefits in return, since none of the companies involved is threatened in terms of survival. A price increase in the service is expected as a consequence of the merger.

Finally, suppliers pressured by customer concentration would also tend to overcompensate on prices at the weakest ends, which are typically the consumers.

If no one asks for a deadline extension, those opposing the merger will be known to the public on March 8th. They have until March 5th to present their arguments to the agency, which falls on a Friday.

CADE’s rejection record has significantly increased since 2012, with the new legislation. Between 1994 and early 2012, there were eight transaction rejections. And since then, to date, 15 deals failed to materialize – 8 were rejected and 7 were dropped by the parties after realizing that there would be resistance from the agency.

Among the operations rejected are the mergers between Estácio and Kroton, Ipiranga and Ale, Ultragaz and Liquigas, and Braskem and Solvay. In several of them, the merger rate would be lower than 70%.

With no deadline extension, CADE should conclude its analysis of the matter soon. But, should any extension occur, the matter may be defined until early 2022.

The best known companies which received a notice from CADE to express their opinion about Localiza and Unidas were Volkswagen, Ford, GM, Renault, Concremat, IBM, CVC, Tokio Marine, Porto Seguro, Vale, Liberty Seguros, Mapfre, Sul America, Claro, Souza Cruz, GSK, Eurofarma, Biolab, Unilever, CCV Locadora, Ouro Verde, Rodobens and Usecar.

Source: Exame