BARREL ROLL
Boeing swings into smaller planes with $4.75-billion deal to take over Brazil’s Embraer,
ANDREW TANGEL AND ROBERT WALL Boeing Co. is taking control of Embraer SA’s commercial jetliner business, extending the U.S. aerospace giant’s reach into the market for smaller passenger planes.
The agreement with the Brazilian company marks another big step in the remaking of the global aerospace landscape that has left Boeing and Airbus SE with an effective duopoly for planes with more than 150 seats. Now, the two aircraft makers are bracing for new competition in coming years from China and Russia, where aerospace companies are working on new single-aisle and wide-body planes.
Chicago-based Boeing said Thursday that it will take an 80% stake in Embraer’s commercial airplane and services business. Embraer will own the remaining 20% of what the two plane makers cast as a joint venture valued at $4.75 billion (all figures US). Boeing will pay its new partner $3.8 billion in cash once the deal closes, Embraer executives said. Embraer will also commit cash and debt to the commercial joint venture, they said, without providing more details.
Boeing shares, which are up 13% this year, were off slightly midday Thursday, while Embraer’s shares plunged 14% as analysts said investors were expecting a higher purchase price. The Wall Street Journal reported in December that Boeing and Embraer were in takeover talks.
Boeing and Embraer had been working to assuage the Brazilian government’s concerns that the deal would compromise the independence of Embraer’s defence business. Workers at Embraer plants in Brazil have protested over the deal in recent months.
Boeing said executives will run the joint venture from Embraer’s base in Brazil and report directly to Boeing Chief Executive Dennis Muilenburg.
Boeing wants the added scale and cost savings to help it compete against Airbus and other rivals. The joint venture would create about $150 million in annual pre-tax cost savings by its third year, Boeing said.
Mr. Muilenburg said the Embraer partnership fits Boeing’s strategy to make investments “that enhance and accelerate our growth plans.”
Embraer executives said they want Boeing’s global network of airline customers to help generate new sales for Embraer jets. That marketing clout has become more important to Embraer since Airbus said in October that it would make some planes jointly with Canada’s Bombardier Inc. Embraer and Bombardier compete directly to make smaller passen- ger jets.
Airbus is also looking for efficiencies through its partnership with Bombardier. The European aerospace company completed its takeover of Bombardier’s CSeries narrow-body plane-making unit on Sunday.
The larger version of the CSeries plane, the CS300, seats around 140 people and competes with smaller versions of Airbus and Boeing narrowbodies. The 120-seat CS100 competes with Embraer’s largest plane. The CSeries has struggled against those rivals, garnering just 400 orders since it was introduced a decade ago.
Airbus believes it can boost CSeries sales in what it estimates to be a market for about 6,000 planes of that size. Airbus is expected to announce some airline commitments for the CSeries at this month’s Farnborough Air Show outside London, the industry’s largest gath- ering this year.
Aerospace executives have said the partnership between Airbus and Bombardier spurred other companies to pursue their own joint-venture talks. “It’s in Embraer’s best interest to get a deal done,” said Carter Copeland, an analyst at Melius Research. “Their commercial business faces a pretty big challenge.”
Boeing and Embraer also said Thursday that they will create a separate joint venture “to promote and develop new markets and applications for defence products and services,” such as Embraer’s KC-390 military transport jet.
Embraer executives said the Brazilian company would have a majority interest in the defence unit but that the details haven’t been worked out.
Embraer, which is based in the state of São Paulo, has been a cornerstone of Brazil’s manu- facturing sector for almost 50 years. The company is the world’s third-largest commercial-jet manufacturer by revenue and has some 18,000 employees. It is best known for making regional jets in the 70to 100-seat range, used heavily on routes that don’t warrant larger Boeing or Airbus planes.
Boeing is the world’s largest aerospace company with a market value of about $194 billion and an order backlog of about 6,000 jets valued at more than $400 billion. It makes commercial jetliners and defence, space and security systems as well as military aircraft, weapons and satellites.
The deal is expected to close by late 2019 and will require regulatory approval. The companies said the deal isn’t binding. Embraer has the right to force Boeing to buy the remaining 20% of the joint venture anytime over the next decade.