June 22, 2017 / 8:14 PM / 2 months ago

Investors doubt Kroton can win approval for Estácio takeover: report

SAO PAULO (Reuters) - Investors are skeptical that a merger of Kroton Educacional SA and Estácio Participações SA to form the world's No. 1 for-profit education company will win Brazil's approval, Morgan Stanley said on Thursday.

In a report, Morgan Stanley (MS.N) analysts led by Javier Martínez de Olcoz Cerdán said Kroton's planned takeover of Estácio has approximately a 75 percent chance of being rejected, based on a selloff of both stocks on Monday and Tuesday.

Investors drove shares of Kroton (KROT3.SA) and Estácio (ESTC3.SA) down 7 percent and 14 percent, respectively.

However, Martínez sees a 60 percent chance the deal will be approved on the condition that the companies sell assets accounting for 15 percent of the combined entity's revenue.

The rout in the shares of both companies came after two Brazilian newspapers said antitrust watchdog Cade is considering vetoing Kroton's takeover of Estácio at a meeting scheduled for June 28. According to the report, only one of the agency's five directors, Cristiane Alkmin, has given signs that the deal could be approved.

Scrutiny of the Kroton-Estácio tie-up comes as rivals and consumer groups air concerns about creating a juggernaut with 10 times as many students as its closest rival in Brazil.

Reuters reported on June 5 that Cade has demanded asset sales larger than initially expected by Kroton as a condition to approve the deal. In February, a preliminary report by the watchdog's economic analysis division said the deal could hamper competition and lead to higher costs for consumers.

Cade, Kroton and Estácio declined to comment.

Martínez interviewed more than 80 local and foreign investors between June 13 and June 19 to understand their views about the Kroton-Estácio deal.

His conclusion that shares are pricing in a no-deal scenario stems from expectations by those investors that Kroton and Estácio would be down 9 percent and 13 percent if Cade rejected the combination.

Reporting by Guillermo Parra-Bernal; Editing by Steve Orlofsky

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