Advisor Diogo Thomson, rapporteur of the merger between Azul () and United Airlines at the Administrative Council for Economic Defense (Cade), voted to approve the operation between the two airlines, with reservations. He presented his vote in the afternoon of this Wednesday, 11th, and now the other councilors present their votes.
The operation analyzed this Wednesday by Cade consists of an increase in the minority stake held by United in Azul, within the scope of the judicial reorganization process of the Brazilian company in the United States, conducted under Chapter 11. With the operation, United’s stake in Azul’s share capital will increase from the current 2.02% to approximately 8%.
On December 30, Cade’s General Superintendence (SG) approved the deal in a summary procedure (faster), without restrictions, concluding that there were no competitive risks arising from the operation. The Institute for Research and Studies on Society and Consumption (IPSConsumo), however, filed an appeal alleging that the operation presented to Cade should have also included the deal with American Airlines, “given the strong strategic intertwining of the UA within the scope of Chapter 11 and the existence of irrefutable influence relationships between the two American companies in Latin American airlines”.
Opportunity with security!
In the vote presented, rapporteur Diogo Thomson pointed out the need for redoubled governance and compliance commitments and stated that any change in this scenario must be taken to Cade. Furthermore, Thomson stated that any failure to comply with these commitments could lead to a review of the operation by Cade. He also signaled that if and when American Airlines enters Azul, Cade will carry out a much more in-depth analysis.
He pointed out that Azul’s new Bylaws provide for specific safeguards, designed to restrict access to competitively sensitive information and to regulate situations of potential conflict of interest.
“I understand that the competition concerns associated with the potential sharing of sensitive information are currently sufficiently mitigated,” said Diogo Thomson. “I understand, however, to highlight that the competitive scenario could be substantially changed in the event of American Airlines’ effective entry into Azul’s corporate structure,” he continued. If such a hypothesis comes to fruition, he understood that the eventual operation should be the subject of a more in-depth competitive analysis, including an assessment of the need to adopt mitigating measures as a condition for its approval.
“In view of the effort, I maintain SG-Cade’s decision to approve the present act of concentration plus the reasons and grounds considered in this vote. I emphasize, however, that although Azul’s new Bylaws have not yet been formally approved, the provisions agreed and considered by this court under the terms of this vote constitute relevant premises for the approval of the operation, together with the commitments assumed by the parties.”
Finally, he stated that “any changes” in corporate instruments or contractual mechanisms that result in the expansion of political rights, governance prerogatives or powers of influence of United in Azul, even if they do not constitute the issue of control, and even if they are not accompanied by an increase in shareholding, must be the subject of information to Cade, so that it can assess the need for new notification.
In recent days, the conclusion of the case was postponed after an appeal filed by IPSConsumo. The reporting advisor qualified the institute as a third party interested in the operation, to deepen the instruction. He cited the complexity of the case and the existence of “still open structural issues, especially related to governance and competitive incentives arising from the operation”.
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What the parties said
IPSConsumo’s lawyer, Gabriel Nogueira Dias, said that this is not a “mere corporate participation” and, highlighting the fact that the Brazilian aviation market is highly concentrated, said that it is necessary to consider United’s relationship with Abra, Gol’s controller, and also Azul’s operation with American Airlines.
“Naturally, we do not ignore the existence of Chapter 11 and we also do not ignore that having a healthy company operating in this market is something relevant. However, naturally a company knows that an ordinary rite process at Cade cannot be decided in 30, 40 days”, he maintained. Dias defended that the operation “takes its time”, with Cade having all the resources to decide.
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Azul’s lawyer, Bruno Droghetti Magalhães, stated that the operation does not generate new overlaps, reinforces the company’s financial capacity and is pro-competitive. He stressed that United’s investment in Azul will remain minority, without acquisition of control, without veto rights and without “any ability to unilaterally influence the company’s competitive strategy”. “It is, therefore, an investment incapable of generating any type of competitive concern”. Droghetti defended the maintenance of the SG’s decision, with full approval of the operation.
