Boeing to have 51 percent share in partnership with Embraer
Boeing will have a 51 percent share in a joint company currently being negotiated with the Brazilian aircraft manufacturer Embraer, Reuters reported on February 25, 2018. The joint venture would follow months of talks on a possible deal between the two companies and challenge their rivals’ Airbus-Bombardier pact on the CSeries aircraft, possibly shaking up the commercial jet industry.
According to the Brazilian O Globo newspaper, cited by Reuters, Boeing has agreed to the Brazilian government’s demand that the U.S. plane manufacturer would have no more than a 51 percent controlling share in a venture with Embraer.
On December 21, 2017, both Boeing and Embraer confirmed their discussions on a potential combination in an official press release, stating that the two companies are engaged in discussions but that there is no guarantee they will result in a transaction.
The statement also read that any transaction would be subject to the approval of the Brazilian government and regulators, the two companies’ boards and Embraer’s shareholders.
The news came after Boeing’s European rival Airbus agreed to buy a majority stake in Bombardier’s 100 to 130 seat CSeries jetliner program on October 16, 2017.
Ever since the announcement of the plans, Boeing has sought the approval from the Brazilian government for a partnership with Embraer that would create a new company focused on commercial aviation with joint ventures and joint business agreements, excluding Embraer’s defense unit, Reuters reported at the time.
Brazil’s government has repeatedly said it is opposed to Boeing taking control over Embraer due to the plane-maker’s key role in the country’s defense sector, although initial Boeing-Embraer talks did involve the Brazilian company’s defense business.
Boeing’s initial plan to buy Embraer was therefore rejected by the Brazilian government, with the Brazilian President Michel Temer saying “All partnerships are welcome, what is not under consideration is transferring Embraer’s control to another [foreign] company,” Bloomberg reported. The U.S. plane-maker moved on to plans on forming a commercial jet venture instead of an outright acquisition.
Throughout the months of discussions, Boeing and Embraer have been structuring an agreement to combine their commercial air operations in a way that addresses the Brazilian government's concerns, Boeing’s CEO, Dennis Muilenburg, was reported saying by Phys.org.
Embraer E-Jet family aircraft (Image: Embraer)
"We're respectful of the concerns the Brazilian government has raised around sovereignty and their national defense," Muilenburg said. "We believe we've structured a deal concept that will satisfy the needs of everybody involved."
On February 22, 2018, the Brazilian Defense Minister Raul Jungmann told reporters that Boeing had understood the government’s refusal to give up control of Embraer. Adding that negotiations on the creation of a third company were advancing well, Reuters reports.
The Brazilian government, however, maintains a ‘golden share’ – a type of share that gives its shareholders veto power over strategic decisions to the company’s charter, including that over Boeing’s push for a partnership, – in Embraer, which is a former state enterprise.
Neither Embraer nor Boeing have responded to requests for comment and have not yet released any official statements on the matter.
What is at stake for the world’s major plane makers
According to Reuters, late on February 25, 2018, another Brazilian newspaper, Valor Economico, reported that Boeing would get an 80 to 90 percent stake in a new commercial jet business with Embraer.
Boeing is the world’s largest aerospace company, while Embraer is the world’s third largest passenger jet maker and the leader in the 70-seat to 130-seat regional jet market. If a deal were reached, the joint venture would consolidate a global commercial jet duopoly, shaking up the industry.
The proposed partnership with Embraer would make Boeing the leader in the smaller passenger jet market, as the Brazilian plane maker also makes smaller commercial aircraft for the regional market and business jets.
This would strengthen Boeing’s product range, as according to Muilenburg, his company and Embraer have “highly complementary product lines”, Bloomberg writes.
“This is actually something we’ve been working on for many years,” Muilenburg said, as reported by Reuters, dismissing reports that Boeing is challenging the recent Airbus-Bombardier tie-up. But analysts have been skeptical of Boeing’s move.
Rob Stallard of Vertical Research Partners told The Financial Times that “To go and buy Embraer would be a major change from what investors have been lead to expect, and also seemingly endorse the Airbus/C-Series strategy that Boeing was so recently unenthused about.”
Stallard also pointed out the Brazilian government’s involvement, which, according to him, “could prove to be the major stumbling block in getting anything done.”
According to Richard Aboulafia of Teal Group, price and Brazilian national politics are two areas of major concern. ”Embraer is a very good company. Does it make sense in anyone else’s hands? I’m not sure I see that,” he said.
According to The Financial Times, both Boeing and Embraer have sought to stifle Canada’s Bombardier CSeries aircraft program with legal challenges. The CSeries narrow-body, twin-engine, medium-range jetliners compete with Embraer’s biggest E-Jet aircraft. The CSeries could also be extended to challenge Boeing’s smallest single-aisle jets.
This would intensify the competition for Bombardier’s CSeries, which is backed by Boeing’s other rival – European Airbus, Reuters writes. It would certainly be a win for Boeing after it lost a trade dispute with Bombardier on January 26, 2018.
In a separate article on February 21, 2018, Reuters reported Muilenburg saying his company sees a “great strategic fit” in a possible acquisition of Embraer but that the deal is not essential.
According to him, if Boeing can get a good deal with additional value for its customers and companies, it will proceed with the partnership. If not, it will not change the company’s strategy. “This is a great complement to our strategy but not a must do,” Muilenburg said.
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