The entrance to a branch of the Pao de Acucar supermarkets in Copacabana, Rio de Janeiro, Brazil, on July 4, 2011.VANDERLEI ALMEIDA/AFP / Getty Images
Brazilian federal prosecutors are looking into the use of public funds in a proposed merger of the country's biggest retailer, Pão de Açúcar, and Carrefour's local business, casting further doubt over the controversial $14-billion (U.S.) deal.
BNDES, Brazil's state development bank, two weeks ago promised to finance the merger of the private companies with €1.7-billion ($2.4-billion) from its investment arm, but the proposal has since been attacked on legal, antitrust and ethical grounds.
Prosecutors asked Luciano Coutinho, BNDES president, to clarify the origin of the funds and decide if they are being used in the public's interest, according to a statement published on the Prosecution Service's website late on Monday.
After initially indicating unconditional support for the transaction, BNDES has since stated it would only finance the merger with the approval of Casino, Carrefour's arch rival in France and co-controller of Pão de Açúcar.
Negotiations among all parties are continuing, but BNDES is now looking at the possibility of reducing its stake in the new group, said one person close to the deal.
Casino claims the merger proposal equates to a "long-standing illegal planned financial transaction" as it was not discussed by both controlling shareholders. The company is pursuing arbitration against its Brazilian partner, the Diniz Group, for allegedly breaking their shareholder agreement by talking to Carrefour without its knowledge.
BNDES has faced heavy criticism in Brazil from opposition politicians and the local media, who see the merger as another example of the development bank supporting politically influential billionaires rather than small businessmen.
Early claims by the government that merging Pão de Açúcar and Carrefour's Brazilian business would be in the national interest have also met with skepticism, given that the resulting group would be mostly controlled by French nationals and would raise competition concerns in Brazil's retail sector.