Brazil fashion companies Arezzo, Soma to merge, faced increasing competition

SAO PAULO, Feb 5 (Reuters) - Brazilian fashion companies Arezzo&Co (ARZZ3.SA), and Grupo Soma (SOMA3.SA), said on Monday they had agreed to a merger to create a entity which will be 54% controlled by Arezzo.

The new company would have yearly revenues of 12 billion reais ($2.42 billion), which according to Citi analysts could create the second-largest player in Brazil's apparel market behind Lojas Renner (LREN3.SA),.

The companies, bringing together more than 2,000 company-owned and franchised stores and 34 brands, will choose the name of the new firm at a later date. Grupo Soma's shareholders will own the remaining 46% stake.

The merger comes as the sector has experienced increasing competition in recent years. It is also facing record-high interest rates and the entrance of Chinese online fast-fashion retailer Shein.

One of the key advantages of the deal should come from the creation of footwear, handbags and accessories for Soma's brands, Arezzo CEO Alexandre Birman told reporters. He will also lead the combined company.

Shares in Arezzo and Soma fell 3.7% and 5.3% respectively in afternoon trading, after jumping more than 10% each in the wake of local media reports last week that a deal was near.

Soma, which owns popular clothing brands such as Animale and Farm, and Arezzo, a premium shoemaker, said the deal must still receive regulatory and shareholder approval. Soma's CEO Roberto Luiz Jatahy, who will head the women's clothing unit, said growing the group's international market was fundamental.

"We see strategic merit to the combination of these operations," analysts at Goldman Sachs wrote on Monday, citing potential synergies in areas such as product development, distribution and supply chain management.

According to the analysts, market participants have also raised concerns regarding integration of the two firms as some areas - such as Soma's largest clothing brand Hering, which was acquired in 2021 - are still undergoing changes.

Birman said Hering's industrial park would be improved and the group would have greater heft when negotiating with suppliers.

The exchange ratio established in the agreement stipulates that Soma Group shareholders will receive 0.12 new Arezzo shares for each Soma share they hold.

The founder of Brazilian investment services provider XP (XP.O), Guilherme Benchimol, said he would be a board member of the new company.