After much speculation and fears among investors, the General Superintendence of the Administrative Council for Economic Defense (Cade) issued an opinion last Monday night (6) recommending the approval of the merger between Localiza (RENT3) and Unidas (LCAM3) through remedies.
The news enlivened the markets: at 10:20 am (Eastern time), RENT3 assets jumped 9.44%, to R$ 60.71, while LCAM3 rose 10.92%, to R$ 27.35.
According to the document, the concentration act “generates relevant risks for the competitive environment in the vehicle leasing market (RAC)”, Localiza’s main business. According to investigations by the autarchy itself, the union between Localiza and Unidas could result in a market concentration, in the RAC, of approximately 70%.
According to the opinion, the markets affected by the operation are, in addition to RAC, fleet management and outsourcing (GTF) and sale of used vehicles in wholesale and retail (semi-new). “This transaction entails horizontal overlaps in all indicated markets.”
In the RAC market, the analysis demonstrated the existence of entry barriers throughout the national territory and, if new players enter the segment, this would not be enough to contest any possible exercise of market power by the applicants. “The post-operation market would be highly concentrated, would have only one other competitor with national presence (Movida) and the fringe, composed of regional and local players, and would not be able to effectively compete with national rental companies.”
The autarchy recommended the signing of an ACC, an Agreement on Control of Concentrations, with structural and behavioral remedies, which must be analyzed by the Court of Cade and by the companies involved in the operation.
Cade’s Council can vote on the merger until October 6th, but this deadline can be extended until January 6th, 2022.
According to analyzes by XP, Credit Suisse and Bradesco BBI, the decision was better than expected, mainly because of the recommended remedies.
The restrictions were softer than analysts pointed out. Among them: 1) Unidas will need to reduce the size of its rent-a-car (car rental) fleet and sell some stores; 2) cancel non-compete with Vanguard (ie Enterprise, National and Alamo brands) and the mutual reference agreement and 3) limit to four brands used in online travel agencies.
Cade did not ask Localiza to sell the Unidas brand and no restrictions were imposed on fleet management and used car stores.
Analysts Regis Cardoso, Henrique Simoes and Alejandro Zamacona, from Credit Suisse, also highlighted that Cade’s Superintendence’s suggestion was for structural and behavioral remedies less severe than initially anticipated (and considered in the bank’s estimates), with antitrust concerns if focusing entirely on the car rental segment.
The structural remedies will affect 136 cities and 38 airports across the country, they point out. Although the number of cars in the solution has not been disclosed, the information disclosed says that the new player will have more than 20 thousand cars, but it will be the third largest player in the country, still behind Movida (MOVI3).
“We believe that this remedy aims to maintain the market structure with three major national players, which means that we do not believe that Movida is eligible to be a buyer of Unidas’ fleet and stores. The Superintendence’s recommendations also include behavioral remedies that, although not fully disclosed, indicate that it could be doing away with the non-competition entered into with Vanguard, which prevented the company from entering the Brazilian market; and use a maximum of 4 brands in online travel agencies for a certain period of time (not disclosed)”, they point out.
Thus, analysts comment that they see this as positive news for both Localiza and Unidas, and that the decision of the General Superintendence increases the chances of the business going through the antitrust, even with medicines.
Credit analysts have an outperform recommendation (performance above the market average) for both Localiza and Unidas, with a target price of R$ 74 for Localiza, which already considers a 60% chance of approval with medicines. In a rejected business scenario, the target price would go to R$60. In the case of an approval without drugs, the target price would be R$83.
As for Unidas, Swiss bank analysts have a target price of R$33, seeing a 60% chance of approval with medicines, R$25 in the case of rejected deals and R$38 in the case of approval without medicines.
In the evaluation of Bradesco BBI analysts, Victor Mizusaki, Andre Ferreira and Pedro Fontana, Ouro Verde may be the natural buyer of car rental assets, although it is one of the companies contesting the incorporation of Localiza-Unidas.
Ouro Verde is owned by Brookfield and is focused on managing light and heavy vehicle fleets. The acquisition of these assets may allow Ouro Verde to replicate Unidas’ successful growth strategy, creating an opportunity for this company to go public.
As for Movida, BBI analysts point out that the company is reducing quarter to quarter the difference in size versus Localiza and Unidas and, according to their estimates, if they assume that Unidas may need to sell 50% of its rent- a-car based on figures for the fourth quarter of 2020, Movida would have 38% of the size of Localiza-Unidas’ fleet in the fourth quarter of 2021, against 26% when the deal was announced in September 2020.
“We don’t expect Movida to acquire the Unidas assets, as the company would be buying used cars and car rental stores with some overlap,” they point out. Analysts maintained the outperform recommendations for Localiza, with a target price of BRL 86, or an upside potential of 55%, and for Unidas, with a target price of BRL 39, or a potential of 57% compared to the last closing . The recommendation is also an outperform for Movida, with a target price of R$34, or a potential increase of 86%.
Also evaluating the opinion as positive, XP highlights that it has a positive recommendation for companies in the sector and emphasizes that the synergies between Unidas and Localiza are not priced.
“Although the LCAM3/RENT3 spread has converged to the business proposal level of around 0.45, we continue to view the merger as unpriced due to (i) shares underperforming Brazil’s main stock index, Ibovespa (between an 8% and 18% rise since September 22, 2020, versus a 21% rise in the Exchange benchmark); and (iii) the flow of local news weighed on the shares, reducing expectations of approval.
Pedro Bruno, Lucas Laghi and Gabriela Ferrante, XP analysts who signed the report, believe that the new company has important synergies to extract from the combined operations, of around R$ 7.8 billion in net present value in total.
This is due to: (i) reduction in RaC and fleet rental costs (approximately R$3.3 billion); (ii) cost savings in the Used Cars operation (approximately R$1.3 billion); (iii) reduction in the financial cost (around R$1.3 billion); and (iv) goodwill amortization (approximately R$1.9 billion), which can be deductible for tax purposes in Brazil.
Blue is also benefited?
In addition to the impact on companies in the sector, BBI points out that the share of Azul (AZUL4) may also recover with the merger of Localiza-Unidas.
This is because the restrictions negotiated in the case of car rental companies can reduce market concentration and at the same time make it easier for a third player with scale to compete with Localiza-Unidas and Movida.
This deal would corroborate the company’s view that Azul could indeed acquire Latam Airlines Brasil. In July 2021, the domestic market combined in the last twelve months reached 65%, in line with Localiza-Unidas.
“In our view, the restrictions should depend on the return of some slots at Congonhas and Santos Dumont airports”, point out BBI analysts, who have an outperform recommendation for Azul, with a target price of R$72, or potential for an increase 98% compared to the last closing.
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