Tide turning in Carrefour bid for Brazil retailer

PARIS/SAO PAULO (Reuters) - The tide appears to be turning against Carrefour (CARR.PA) in its push to combine with Brazilian retailer Grupo Pao de Acucar, as the Brazilian government backs away from the deal and French rival Casino (CASP.PA) shows no sign of dropping its resistance.

Casino, Pao de Acucar's controlling shareholder, said on Tuesday it was confident that its opposition to the deal would hold up in courts. It also accused Carrefour of demonstrating hostile behavior by continuing to pursue a stake in Pao de Acucar (CBD.N) since the deal was first announced last week.

The deal has pitted the two French retailers against each other in an increasingly acrimonious battle for the biggest retailer in Brazil, one of the world's fastest-growing consumer markets. The proposal, which was made by a local investment fund with a pledge of government financial support, is valid for 60 days but requires Casino's approval to go through.

Investors had initially assumed that Casino would eventually drop its resistance to the deal, largely because Brazil's government had thrown its political and financial support behind it. But Brazilian officials have changed their tone in recent days, visibly caught off-guard by criticism of the deal at home.

The involvement of Brazil's state development bank BNDES in the merger plan has sparked public uproar. Critics say the move could potentially help Pao de Acucar Chairman Abilio Diniz, the architect of the deal, break an option that would give Casino full control of the Brazilian company in June 2012.

Carrefour said on Tuesday it was not planning a hostile bid for Casino's Brazil assets -- comments that some observers including Standard & Poor's Equity Research analyst James Monro took to mean that Carrefour is shying away from a protracted battle.

"Maybe we'll see them trying to broker some other deal with Casino. But Casino holds all the cards at the moment," he said.

A long legal fight would be an unwelcome distraction for both Carrefour, which is struggling to reverse years of underperformance in its main European markets, and Pao de Acucar (PCAR4.SA). The Brazilian retailer is in the process of merging two home appliance retailers it bought in 2009.

Another analyst, who declined to be named, said Carrefour had gotten ahead of itself.

"This deal was on the wrong track from the start. Carrefour is backpedaling. As it may be starting to realize, Casino has been putting the marker down, and nothing can be done without its consent," he said.

BNDES CONDITIONS FINANCIAL SUPPORT

BNDES President Luciano Coutinho, who on June 28 said the deal was of "great strategic importance" for Brazil, said in a weekend interview with a local magazine that the bank would only finance the deal if both Casino and Diniz agreed to it.

BNDES's pledge to finance the deal was widely seen as an attempt by Brazil's government to keep Pao de Acucar mainly in Brazilian hands. Carrefour would be allowed to have a stake of no more than 50 percent in the combined company.

On Monday, Carrefour's board approved the merger plan. The move prompted an angry response from Casino, which warned that a deal could not go ahead without its consent and made a second request for arbitration at the International Chamber of Commerce against Diniz approaching Carrefour.

Casino said on Tuesday that Chief Executive Jean-Charles Naouri had been assured by BNDES that the bank would not support a transaction without his permission.

"Carrefour has no hostile intentions regarding Casino," the world's second-biggest retailer said in a statement, adding that the merger plan was submitted by a third party, an investment vehicle called Gama controlled by Brazil's BTG Pactual.

Separately, European shareholder rights group Deminor complained in a letter to France's AMF stock market watchdog that Carrefour had failed to inform minority shareholders at its June 21 annual meeting that it was in talks with Diniz.

Reuters obtained a copy of the letter, which could eventually lead to a formal investigation by the AMF.

The AMF said it was closely monitoring the communications of the companies involved but declined further comment.

Carrefour said the criticisms from Deminor were "totally groundless" and it had met all financial communication obligations in the Brazil matter.

(Additional reporting by Julien Ponthus in Paris and Mark Potter in London; Writing by Brian Winter; Editing by Todd Benson and Gerald E. McCormick)