Boeing Could Control Embraer Exec Jets Under Tie-up

After the Brazilian government used its “golden share” to block two proposals from Boeing, which initially wanted to buy all of Embraer, negotiations now focus on a joint venture with Boeing having 80 percent to 90 percent of the capital and total control, according to several newspaper reports. Embraer's executive and commercial jet divisions would be included in the new venture, with a “shrunken” Embraer retaining defense.

The Boeing Company and Embraer in December confirmed that they are engaged in talks about a “potential combination.” At that time, the companies issued a short statement saying the basis of a combination remains under discussion and that “there is no guarantee a transaction will result from these discussions.” Such a move, though, would be subject to regulatory and shareholder approvals, the companies said, declining any further comment.

Boeing/Embraer talks do not come as a surprise given the looming alliance of rivals Airbus and Bombardier. Airbus and Bombardier have formed “clean teams” as they finalize plans for the European manufacturer to take a 50.01-percent stake in the C Series Aircraft Limited Partnership (CSALP). Under the agreement, Bombardier Aerospace and Québec provincial economic development agency Investissement Québec will reduce their stakes in CSALP to 31 percent and 19 percent, respectively. In addition Bombardier has extended its supplier relationship with Airbus.

The prospective alliance would come as Embraer prepares to bring the first of its new E-Jet E2 family, the E190-E2, to market this year. Embraer Commercial Aviation CEO John Slattery had indicated that any stimulation of the narrowbody market resulting from Airbus’s involvement in the Bombardier C Series program could also serve to stimulate Embraer’s E190-E2 and E195-E2, the primary challengers of the C Series in the under-150-seat market segment.

At press time, Brazlian business newspaper Valor Econômico predicted complex negotiations on such subjects as where engineers would be assigned, and whether Boeing would handle sales and marketing of Embraer's defense line. Agreements on parts supply, technology, and training would have to be hammered out, with the proposal returning to the Brazilian government sometime after Carnival ended February 14.

Embraer issued two denials of market rumors earlier last month, while admitting that a joint subsidiary is under consideration, though Valor is the first to address business aviation's destiny under any deal.

Embraer's most recent results show that through the third quarter, commercial and business aviation were responsible for 62.6 percent and 20.3 percent, respectively, of the $4.1 billion in net revenue, while defense accounted for 16.6 percent and “other” for 0.5 percent.

Previous speculation about the Boeing-Embraer deal in the Brazilian press had focused on guarantees of what production would remain in Brazil, but Valor concentrated on the money. According to the business newspaper, the new firm would be independently valued, paid for in cash that would be distributed as a dividend to shareholders, and would report directly to Boeing in Chicago, with Embraer retaining the rights inherent to any minority shareholder.