American aircraft manufacturer Boeing and Brazilian manufacturer Embraer have confirmed that they are discussing a “potential combination”. A collaboration between the two airlines would allow Boeing to get a foot into the small jet market, which Airbus reached into earlier this year when they purchased 50.01% of the Bombardier C Series program.

Options under discussion include a joint venture that could allow the two manufacturers to share supplier savings and cross-sell their respective lineups of commercial jets. However, the partnership will probably fall short of being a full takeover; an outright purchase by Boeing would be its largest since it bought rival McDonnell Douglas Corp. in 1997.

The two companies have yet to make more than a few details on the matter public. Both say that the situation “remains under discussion”.

“There is no guarantee a transaction will result from these discussions. Boeing and Embraer do not intend to make any additional comments regarding these discussions,” said a joint statement released by the two companies.

The deal would require approval by the Brazilian government, regulators, and Embraer shareholders. The Brazilian government has a “golden share” in the company that gives it veto power over company decisions such as this, and, according to local press accounts, President Michel Temer is already showing opposition to the proposal.

In response to Brazilian government opposition to the partnership, Boeing has proposed a takeover of only Embraer’s commercial line, allowing the Brazilian government to keep Embraer’s defense sector.
Photo Source: Wikimedia Commons

Bloomberg reports that President Temer told Brazilian Defense Minister Raul Jungmann and Air Force Commander Nivaldo Rossato that Temer won’t allow Embraer to change hands. Temer did say, however, that he will welcome an injection of foreign capital into the company.

Embraer was created by the Brazilian government in 1969 and was privatized in 1994. It has been a source of national pride and an example of efficiency and innovation for the Brazilian people.

“National pride is an important consideration here that could define the structure of these arrangements,” said Robert Spingarn, an aerospace analyst at Credit Suisse Group AG, on Thursday. “Accordingly, we think JVs could be preferable in certain circumstances over outright mergers.”

“The moment that control of Embraer passes to a company from another country, it will control strategic decisions” for Brazil, Jungmann said. “No country would give up control of that.”

“We have always had deep respect for the role of the Government of Brazil, as well as their important defense and security concerns,” Boeing spokesman Phil Musser said.

Despite this government opposition, Boeing says that talks are still ongoing. The giant has even offered its own proposals to counter Brazil’s worries on a sale of Embraer.

“If the government persists with its objections, one structure that could be proposed is for the government to keep control of [Embraer’s] defense business, and that Embraer sells its commercial business to Boeing,” a source said. “The deal is strategically important for Boeing because it will fill out its commercial line with regional jets.”

“[A commercial jet joint venture would] make a lot of sense,” Teal Group analyst Richard Aboulafia said. “Even some kind of military joint venture such as military transports would make sense — but an acquisition of Embraer makes no sense.”

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Categories: Industry Talk