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Brazil Antitrust Body Said Poised to Reject Kroton-Estacio Deal

Brazil Education Behemoth Fights for $1.8 Billion Deal Approval

(Bloomberg) -- Kroton Educacional SA’s proposed acquisition of its biggest rival in the education business, Estacio Participacoes SA, looks dead in the water.

Brazil’s antitrust regulator, known as Cade, is poised to reject the merger in a meeting on Wednesday, said a person with direct knowledge of the matter. Going into the session, four of Cade’s six members said they planned to vote against the deal, while only one was willing to approve it with restrictions, said the person, who asked not to be identified because the vote had not yet concluded. Regulators have until July 27 to issue a decision.

With the $1.8 billion deal in jeopardy, Kroton Chief Executive Officer Rodrigo Galindo had bolstered efforts to get the deal approved in the weeks leading up to a regulatory decision, hiring an all-star team of former antitrust regulators and a prominent former official. The ambitious 41-year-old, who oversaw Kroton’s transformation into the world’s biggest for-profit education company, assembled an entourage so large it couldn’t fit into the meeting room at the offices of Cade, requiring attendees to take turns at the table, according to two other people with knowledge of the gatherings.

In the final days of negotiations, Kroton had agreed to restrictions that would have required it to sell assets equivalent to about 250,000 students, said the person with knowledge of how Cade members planned to vote. Cade had previously weighed whether to require Kroton to sell the onsite learning business of its Anhanguera unit and the distance-learning division of Estacio, two people familiar with the matter told Bloomberg in early June.

Kroton, Estacio and Cade declined to comment.

In a regulatory filing Tuesday, Kroton said it’s studying all the necessary measures to get antitrust approval, including potential divestitures as well as a temporary withdrawal and subsequent re-submission of the deal.

Kroton and Estacio stocks have been volatile on speculation the antitrust body could reject the deal or apply such severe restrictions that it’s no longer palatable. JPMorgan analysts Marcelo Santos and Andre Baggio recommended buying Kroton shares if the deal fails and they drop.

Brazil Antitrust Body Said Poised to Reject Kroton-Estacio Deal

Kroton’s hiring of former Justice Minister Jose Eduardo Cardozo and former Cade commissioners Vinicius Marques de Carvalho, Carlos Emmanuel Joppert Ragazzo and Ana Frazao, among others, gives it a roster of movers and shakers in Brasilia and experienced hands in complex antitrust cases. When Cardozo was minister, he appointed one of the current Cade commissioners, Gilvandro Vasconcelos.

In his first interview after being sworn in as Cade president,  Alexandre Barreto de Souza told Bloomberg that “it’s virtually impossible” to influence Cade politically and that he is aiming to vote on the deal on Wednesday. “My position here is one of oiling a fully functioning machine to keep it running with business as usual,” he said.

Cade’s commissioners were already under intense scrutiny and are eager to demonstrate their political independence. The agency has been in the hot seat since mid-May, when recordings became public of a legislator and former aide of President Michel Temer agreeing to intervene inappropriately in an antitrust process that was under analysis.

In an interview, Cardozo said he’s not trying to influence Cade’s decision, saying he’s only advising Kroton’s board on the deal.

“If I never intervened in Cade as a minister, how would I intervene as a lawyer?’’ Cardozo said.

Former Cade members also advised third parties that were against the Kroton-Estacio deal. Gesner Oliveira, a former president of Cade who now works as a consultant at GO Associados, is representing Ser Educacional SA, a smaller competitor that also tried to acquire Estacio and urged Cade to reject the deal.

“Political pressure has no effect on me,’’ Cristiane Alkmin, the Cade commissioner in charge of the Kroton-Estacio case, said in an interview. “I don’t care who is acting in a certain process and which political connections this person may have. My analysis is technical.’’

New Cade president Souza, who took over June 22, and Mauricio Oscar Bandeira Maia, who is expected to join the board soon because previous commissioners’ terms expired, may harden the regulator’s stance against a Kroton deal. Both new members were auditors at Brazil’s audit court, TCU, which published a 99-page report in November on the flaws that led the government-sponsored student financing program known as Fies to become unsustainable. Kroton is mentioned in the report as the for-profit institution that benefited the most from the program expansion, followed by Estacio.

--With assistance from Simone Iglesias

To contact the reporters on this story: Fabiola Moura in Sao Paulo at fdemoura@bloomberg.net, Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net.

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Jessica Brice, Rob Golum