December 20, 2016 / 8:50 PM / a year ago

Kroton-Estácio spinoff opposed by Brazil education groups

SAO PAULO, Dec 20 (Reuters) - Three education groups have formally opposed Estácio Participacoes SA’s plan to spin off distance-learning operations to win approval for a takeover by Kroton Educacional SA in Brazil’s largest education industry merger.

Fenep, an entity representing about 5 million private-sector students from kindergarteners to post-graduates, joined with groups Abrafi and Anaceu to lodge a complaint with the Education Ministry over the proposed spinoff, Amábile Pacios, a Fenep director, told Reuters on Tuesday.

The challenge to the Kroton-Estácio tie-up comes as rivals, consumer groups and regulators step up scrutiny of a deal that could create an education company with 10 times more enrolled students than its closest rival in Brazil.

In March, Kroton and Estácio consulted Seres, a regulatory oversight body of the ministry, regarding the possibility of getting approval for a spinoff of an unnamed unit, according to documents reviewed by Reuters.

The ministry said such a request would only be granted under exceptional circumstances including a legal ruling or the migration of state schools to the federal system, according to a joint statement by Anaceu and Abrafi.

“Aside from breaching the existing norms, the proposed separation will create two big monopolies, on the on-site and the online segments,” Pacios said.

Kroton is mulling disposal of 100 percent of Estácio’s distance-learning business to secure Brazilian antitrust approval for the takeover.

Without any disposals, Kroton-Estácio could be up to 28 times bigger than the local unit of U.S. peer Laureate Education Inc in terms of online students.

Belo Horizonte-based Kroton and Rio de Janeiro-based Estácio declined to comment specifically on the complaint by the education groups. The Education Ministry did not immediately respond to a request for comment.

Kroton said it remains committed to approving the deal before competition watchdog Cade, and is prepared to introduce remedies deemed necessary to address any monopolistic concerns.

The parties filed for Cade approval on Aug. 31. The agency may take up to 330 days to complete analysis of a takeover or merger.

Estácio wants to spin off its distance-learning division away from its Niterói campus in a bid to create “an isolated unit” which would then incorporate its online education programs, according to the request sent to the ministry.

If granted, the request would pave the way for Cade to approve the deal in a manner which the companies say would “avoid market concentration” and “maintain student options,” according to the document submitted to the ministry. (Reporting by Ana Mano; Editing by Andrew Hay)

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