Boeing reaches deal with Embraer
$4.75B regional-jet venture to take on Airbus, Bombardier
Boeing is forming a $4.75 billion venture with longtime industrial partner Embraer, a move that will bolster its arsenal in the newest battlefront with Airbus: the market for smaller jetliners.
Under a preliminary deal, Boeing will own 80 percent of a partnership controlling Embraer’s commercial airplane and services businesses and the Brazilian manufacturer holds the rest, the companies said in a statement Thursday. The tie-up bolsters the duopoly held by Boeing and Airbus as competitive threats emerge from rivals in Russia, Japan and China.
By adding Embraer’s E-Jet family to its portfolio, Boeing will expand its manufacturing base abroad while extending its reach into the market for 100-seat planes. While the two companies have discussed combining for more than a decade, the talks gained urgency in recent months as Airbus prepared to take control of the C Series — the advanced jetliner that has drained billions of dollars from Bombardier Inc. Airbus is set to detail its plans for the Canadian jet family Tuesday, days before a major aviation trade show in Farnborough, England.
“For Embraer, it means that we will have better access to markets with Boeing,” Paulo Cesar de Souza e Silva, Embraer’s chief executive officer, said on a conference call. “Boeing also values a lot the way that Embraer designs, develops and engineers aircraft.”
Boeing will pay $3.8 billion for its stake in the venture, a valuation that prompted Embraer investors to look for the exits. The Brazilian company plunged 10 percent to $23.50 on the New York Stock Exchange, after falling as much as 16 percent for the biggest intraday decline since the days after the Sept. 11, 2001, terrorist attacks. Embraer had surged 35 percent this year through Wednesday on anticipation of the deal.
Boeing advanced less than 1 percent to $333.18 in New York.
The commercial venture will be run by a CEO and management team in Brazil, while Boeing CEO Dennis
Muilenburg will have ultimate control. Embraer, a jewel of Brazilian industry, plans to use the proceeds of the joint venture for high-return investments and reducing debt, as well as a special dividend payment and a potential share buyback program.
The Sao Jose dos Campos, Brazil-based manufacturer will remain a separate company that makes military and private jets while reaping a revenue stream from the new partnership. The structure, along with the company’s flagging sales and an increasingly challenging market, helped win the support of the Brazilian government.
Boeing and Embraer said
they plan to form a second joint venture to develop new markets for defense products and applications that bolster the Brazilian company’s military portfolio, including its KC-390 cargo aircraft.
The companies expect to finalize the agreement over the next several months and present it in November for formal approval by Brazil’s government, which has veto power, Souza e Silva said. It will go before shareholders by December, he said. Once the transaction is ratified by the government, there will be no need to involve the next president in the conversations, the CEO said. Brazil will hold presidential elections in October.
The deal is expected to close by the end of next year, a goal Embraer Chief Financial
Officer Nelson Salgado called conservative. The companies foresee the need to get antitrust approvals in at least 10 countries in which they jointly operate. Boeing said the partnership would add to its earnings beginning in 2020.
For years, Boeing and Airbus focused on larger, more-profitable jetliners and shifted away from the smaller planes, which have similar development costs but sell for lower prices. Airbus’ deal with Bombardier, and Boeing’s pact with Embraer, signal that the big plane-makers intend to deny a foothold in the lucrative narrow-body market to ambitious newcomers, such as Commercial Aircraft Corp. of China.
The Brazilian company has overtaken Bombardier as the largest manufacturer of
regional jets while burnishing its reputation for engineering prowess. In an industry where product delays are the norm, Embraer has introduced 10 allnew aircraft over the past 15 years, largely on budget and on time, Ron Epstein, an analyst at Bank of America Corp., wrote earlier this year.
Created in 1969 by the Brazilian government and privatized in 1994, Embraer has been touted as a source of national pride for the commodities-driven country and an example of efficiency and innovation, though corruption scandals in the past few years have tainted that image.
Information for this article was contributed by Brandon Kochkodin and Vinicius Andrade of Bloomberg News.