August 12, 2016 / 5:26 PM / 2 years ago

WRAPUP 1-Brazil's Kroton stands by Estácio merger even as accounting flaws found

SAO PAULO, Aug 12 (Reuters) - Kroton Educacional SA , Brazil’s largest for-profit education firm, expects shareholders to endorse next week a proposed takeover of rival Estácio Participações SA, which on Friday booked charges for a two-year accounting flaw.

Management at Kroton, who spoke at a Friday conference call to discuss second-quarter results, said Estácio’s accounting adjustments do not put their combination at risk. Earlier in the day, Estácio posted a surprise quarterly loss due to the charge.

“During due diligence, we knew adjustments would take place,” Kroton Chief Executive Officer Rodrigo Galindo said on the call. Shareholders of both companies will discuss and vote on the transaction at separate meetings taking place on Aug. 15.

The situation underscores the many hurdles facing the merger of Kroton and Estácio, which are attempting to create the world’s No. 1 for-profit education company with about 1.5 million students.

Shares of Estácio and Kroton seesawed on Friday, reflecting the impact of the disclosure of Estácio’s accounting flaws - which offset strong demand for Brazilian shares on the São Paulo Stock Exchange.

Estácio shed 2.5 percent to 17.92 reais in early afternoon trading, after rising to as much as 18.53 reais. Kroton shed 2.8 percent to 14.84 reais, bucking gains of up to 1.9 percent.

Both companies are expected to submit their combination for antitrust approval once shareholders give their consent, Galindo said. Analysts are expecting tough regulatory scrutiny of the deal because of significant operational overlap.

Estácio, which agreed to be acquired by Kroton last month, reported a surprising quarterly net loss of 19.9 million reais. Analysts had a consensus estimate for a profit of 109 million reais, as compiled by Thomson Reuters.

Kroton posted strong second-quarter results after reining in payroll costs and expenses in the quarter, helping counter declining revenues amid Brazil’s harshest recession since the 1930s. Net income at Belo Horizonte, Brazil-based Kroton came in at 519 million reais, beating a consensus estimate of 465 million reais compiled by Thomson Reuters.

$1 = 3.1635 Brazilian reais Writing by Guillermo Parra-Bernal; Editing by Chizu Nomiyama and Phil Berlowitz

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