Earlier this week, Brazil's Conselho Administrativo de Defesa Econômica (CADE), used its veto power for the first time in 42 years to block Brazil's Nestlé operations from acquiring the Brazilian chocolatier Garoto for R$570m.

Apart from the significance of the first-ever veto (by a 5-1 vote), what's significant about this action is the length of time it took CADE to make its decision (nearly two years), and the fact that they took input from another major competitor, Lacta, owned by Kraft Foods.

Prior to the merger, agreed in February of 2002, Nestlé had 34% of the market for chocolate, with Garoto having 24.5%, Lacta having 33% and other smaller players having the balance. For the past two years, Nestlé-Garoto have been operating jointly, having signed an accord with CADE that the operation could be reversed if judged uncompetitive.

And that's what's happened. CADE cited the following reasons for denying the merger:

• over-concentration in the marketplace, particularly in chocolate toppings
• no compelling national economic reason for further concentration in the sector
• high barriers of entry for new competitors, owing to the large marketing and advertising costs required to establish presence in the market
• concentration to only two major companies would give insufficient protection from price rises in the market

It's an interesting state of play. The vote went against the recommendations and lobbying of many regional politicians in Espírito Santo who were excited about the prospect of further job creation from the merger. CADE has kept an independent Brazilian presence in the marketplace for the time being, although Garoto's ability to compete has been in question in the recent past. Lacta has prevented their major competitor from taking a nearly 2-1 size advantage on them. Nestlé's local director has said he is both disappointed and hurt by the decision - he claims to have been encouraging his parent company to make major further investments in Brazil (including the instant coffee sector), but now to be backing off from the decisions. Nestle employs 15,000 Brazilians.

I'm most interested in CADE's citing national interest in this concentration. Last year's TAM-Varig union was taken in the interest of keeping two struggling national carriers in the sky. Can it be that CADE is moving from a rubber stamp to a more anti-merger stance? It wouldn't strike me as too out-of-character, if so. I suppose the facts will always have to be considered individually, but here the interests of the state seem to be taking priority over those of the market.

I don't think the "national interest" argument used in the airline merger has changed in this case.

TAM & Varig were both "national" (that is Brasilian-flag) airlines. If they went under, then you're left with VASP (serious problems of it's own*) or Gol (less than five years in business?) as the only airlines of the country with the fourth largest (and very successful) airplane company in the world, which most nationalists would find embarrassing.

In the chocolate case, the takeover of the "national" chocolate brand of the second largest (and for many years largest) cocoa-producing country in the world by a company based in Switzerland would be equally embarrassing.

ALthough I suppose this means now that Nestle won't be marketing bombons Serenata de Amor here in the states... que pena.

*what ever came of the VASP fiascos of a few years back? I was surprised to see they're still in business.