Federal prosecutor recommends blocking Kroton-Anhanguera deal

10 April 2014. By Flavia Fortes.

The Federal Prosecutor’s Office for the Brazilian competition authority recommended that the regulator block Kroton’s acquisition of rival education company Anhanguera.

The prosecutor said that the combined company would have to dispose of assets related to the Anhanguera brand — a condition that would be tantamount to disapproval of the transaction outright.

However, if the regulator’s Tribunal decides otherwise, the prosecutor recommended that Anhanguera assets in the market for on-campus undergraduate courses would have to be divested, as would an Anhanguera institution because of concerns about the market for long-distance undergraduate courses. Other remedies might also be necessary, according to the prosecutor’s
opinion.

The Administrative Council for Economic Defense, or CADE, on Wednesday denied a request by the parties to keep confidential the federal prosecutor’s rejection of the deal.

The prosecutor suggested a conservative analysis of the transaction because it has the potential to affect competition in the education sector, and education is a fundamental right under Brazil’s constitution. The opinion identified as one of its main concerns the quality of education offered to consumers.

The opinion said that the existing regulation in the education sector prevents timely entry of new players in the market. The prosecutor also rejected the possibility that efficiencies compensate for the risk of anticompetitive effects arising from the transaction.

“The Federal Prosecutor’s Office considers undesirable, from a competition perspective, the combination of the companies’ activities in the markets where there are concerns,” the opinion said.

While the parties argued that the relevant geographic market for long-distance undergraduate courses shouldn’t be defined as national, the prosecutor disagreed, citing economies of scale.

CADE’s lower unit, the Superintendence, has said that remedies are necessary in the market for on-campus undergraduate courses, and CADE’s attorneys have said that the transfer of an institution is required because of concerns about the market for undergraduate long-distance courses.

However, the prosecutor said it’s unclear how such remedies would affect the companies’ other activities, such as the production and distribution of course materials, on-campus undergraduate courses in those markets not identified as problematic, and on-campus and long-distance courses for graduate students.

Economies of scale such as trademark, investments in publicity, capacity management, overall expenditures, and infrastructure, among others, were not properly addressed by the Superintendence, the prosecutor said.

The prosecutor’s opinion said that other aspects of the transaction are unclear and “require further instruction as to how the possibility of economies of scope affect the proposed remedies suggested by the agency’s lower unit and its [legal] office.”

The Federal Prosecutor’s Office has two representatives within CADE who can issue opinions on mergers and acquisitions or conduct investigations on its own or by request of a councilor. Its opinion is not binding on the final decision by CADE’s upper-level tier, the Tribunal.

	Eliot Gao

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