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Boeing Explores Embraer Tie-Up to Match Airbus Small-Jet Foray

Dec. 22, 2017
The options include a joint venture that would enable the companies to cross-sell their complementary lineups of commercial jets and negotiate better deals with suppliers.

Boeing Co. is considering a “potential combination” with Brazil’s  Embraer SA, the companies said, setting the stage for a blockbuster deal that would expand the U.S. aerospace giant’s reach into the highly competitive market for smaller jets.

The options include a joint venture that would enable the companies to cross-sell their complementary lineups of commercial jets and negotiate better deals with suppliers, said a person familiar with the matter. Such a partnership would stop short of a politically risky takeover by Boeing, said the person, who asked not to be named because the talks are private.

Boeing’s potential Embraer deal raises the prospect of a duopoly with Airbus SE that would extend into the market for smaller planes, where manufacturers in Canada, Russia, Japan and China are emerging as competitive threats. Airbus secured its role two months ago by agreeing to take control of Bombardier Inc.’s C Series program -- the target of a trade complaint by Boeing.

“That space is just not big enough, in my view, to support more than two OEMs,” said John Plueger, chief executive officer of Air Lease Corp., using an industry acronym for original equipment manufacturers.

Embraer’s American depositary receipts jumped a record 22% to $24.42 at the close in New York. Boeing fell 1% to $295.03. The Chicago-based company’s 90 % advance this year is the biggest on the Dow Jones Industrial Average.

'Under Discussion'

The planemakers provided few details publicly beyond saying that the shape of the tie-up “remains under discussion,” and would require approval by the Brazilian government, regulators and Embraer shareholders.

An outright acquisition would be Boeing’s largest since it bought U.S. rival McDonnell Douglas Corp. in 1997, and would advance a consolidation wave sweeping through the aerospace sector.

While Boeing has focused on “bolt-on” deals since then, Chief Executive Officer Dennis Muilenburg and chief strategist Greg Smith signaled a willingness to consider bolder strategic moves this year when they promoted Kent Fisher, a rising star, to head the team that handles large mergers and strategic partnerships.

But a takeover would mark a shift away from the company’s emphasis on handing cash back to shareholders through dividends and stock buybacks, a key driver of this year’s stock surge. It would also be likely to spark political opposition -- and Brazil holds a “golden share” in Embraer that gives it veto power over an acquisition.

Presidential Power

Brazilian President Michel Temer told defense officials he won’t allow control of the company to change hands, according to the newspaper Folha de Sao Paulo.

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

For years, Boeing and Airbus have focused on larger, more profitable jetliners and shifted away from planes with 100 seats or less, which have similar development costs while selling for commodity-like prices. Airbus’s deal with Bombardier, and Boeing’s talks with Embraer, signal that the big planemakers intend to deny a foothold to newcomers such as Russia’s Sukhoi.

A closer relationship with Embraer would also offer benefits to Boeing beyond having a product to compete with an Airbus-backed C Series, JPMorgan Chase & Co.’s Carlos Louro and Seth Seifman said in a report.

One is the chance to develop low-cost manufacturing capability, since Boeing makes all its planes in the U.S, they said. Another is to benefit from the same supply-chain efficiencies that Airbus and Bombardier are planning. A third is the opportunity to limit potential cooperation between Embraer and China’s Comac, an emerging rival.

Created in 1969 by the Brazilian government and privatized in 1994, Embraer has been held up as a source of national pride and an example of efficiency and innovation in a commodities-driven country, though corruption scandals in the past few years have tainted that image.

Airbus Competition

The Sao Jose dos Campos-based company has enjoyed a collegial relationship with Boeing over the years. The news of Airbus’s C Series venture fanned speculation that the two might draw closer to ward off the competitive threat. Boeing is also Embraer’s commercial and maintenance partner for the KC-390, a military cargo plane still being developed.

The landscape for commercial aerospace –- and Embraer’s upgraded E2 jets -- changed when Bombardier shocked the industry by handing over the C Series to Airbus at no cost after pouring $6 billion into the narrow-body program.

“I’m sure Embraer’s view of the likely success of their product in the E2 was materially altered by the Airbus transaction for the C Series,’’ said Carter Copeland, an analyst at Melius Research. “They went from competing against a distressed Bombardier to competing against a healthy and extremely competitive entity in Airbus. That changes the mindset of the leadership team at Embraer.’’

By Julie Johnsson

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