US ruling piles pressure on Boeing-Embraer talks
An unexpected US trade ruling last week has added to pressure on Boeing Co and Embraer SA to pull off a proposed tie-up but it will still require careful coaxing to get the Brazilian government on board. A US trade body shocked the aerospace industry by scrapping tariffs on CSeries jets sold by Airbus SE and Bombardier Inc, toughening competition for Embraer jets in the 100- to 130-seat segment.
News of the CSeries joint venture in October brought Boeing and Embraer’s long-simmering talks to a boil, according to a person familiar with the matter, accelerating a move that would consolidate a global passenger jet duopoly.
After decades of going head-to-head with Bombardier regional jets, Embraer is looking for its own heavyweight partner. Boeing is also eager to sell a more complete line-up against arch-rival Airbus.
Two sources familiar with the BoeingEmbraer talks said the CSeries winning unfettered access to the US market had strengthened the impetus towards a deal.
“We think a Boeing-Embraer tie-up — either an acquisition or a partnership — is more probable now,” wrote Chris Higgins, a senior equity analyst at Morningstar, after the ruling by the US International Trade Commission (ITC).
The nature of the deal, which Boeing and Embraer have publicly sidestepped by calling it a “potential combination,” will be decisive in overcoming concern in Brasilia about US influence over defence programs.
The Brazilian government can veto any takeover of Embraer due to a socalled ‘golden share’ in the former state enterprise.
“The recent ITC actions have no bearing on the discussions with Embraer, which pre-date them,” Boeing spokesman Phil Musser said.
“This is the natural evolution of a longstanding partnership that has evolved over time.”
Boeing executives returned to Brasilia last week with details of how they hoped to get “ownership but not control” of Embraer, according to two sources.
Threading that needle has become crucial as President Michel Temer and senior aides publicly ruled out “transferring control” of the planemaker, an icon of Brazilian industry.
“It’s already been settled: Control will remain with the federal government,” Temer said in a newspaper interview, obscuring the difference between outright ownership, which the government gave up two decades ago, and the golden share that it retains.
Embraer’s controlling bloc of shareholders was dissolved more than a decade ago and Brazil’s public sector now holds less than 10 per cent of its shares.
The company’s two biggest shareholders, Britain’s Mondrian Investment Partners Ltd and US-based Brandes Investment Partners LP, together own nearly 25 per cent, according to the company’s website.
Yet Embraer bylaws block foreign investors from casting more than 40 per cent of shareholder votes and the government’s golden share gives it a strategic veto over takeovers and military programs.
“The golden share guarantees control. The government won’t give that up,” said a presidential aide, who spoke on condition of anonymity. “A commission run by the defence minister has still not delivered its verdict to the president. What I have officially is just that: Not giving up the golden share.”
Boeing is willing to maintain the protections of Brazil’s golden share, sources have said previously, and the company has suggested a range of business structures that would respect the government’s concerns.