Boeing confirms talks to combine with Embraer of Brazil

Bloomberg News and Herald staff

EVERETT — Boeing is in talks to acquire or merge with Brazilian aircraft maker Embraer, though “there is no guarantee a transaction will result from these discussions,” the company said Thursday. Boeing did not say whether the potential deal would be a purchase or a merger, calling it “a potential combination.”

“Boeing and Embraer do not intend to make any additional comments regarding these discussions,” Boeing said in a news release. “Any transaction would be subject to the approval of the Brazilian government and regulators, the two companies’ boards and Embraer’s shareholders.”

The talks were first reported by The Wall Street Journal, which cited unidentified people familiar with the matter.

Embraer would get a substantial premium over its $3.7 billion market value, the newspaper reported Thursday. The companies are awaiting word from the Brazilian government, which has veto power over a sale, on whether it would allow a transaction to go through, the Journal said.

An acquisition would be Boeing’s largest since it bought U.S. rival McDonnell Douglas Corp. in 1997 and would advance a consolidation wave sweeping the aerospace sector. Boeing would gain an aircraft offering in the 100-seat category to counter a new threat from Airbus, which agreed in October to take control of Bombardier Inc.’s C Series program — the target of a trade complaint brought by Boeing.

“Boeing has a very solid commercial airline business that covers a lot of the key markets, but they were missing this piece in their portfolio,” said Jeff Windau, an analyst at Edward Jones.

Boeing and Airbus have focused on larger, higher-margin aircraft, avoiding planes with 100 seats or less that have similar development costs while selling for commodity-like prices. Boeing’s potential Embraer deal raises the prospect of a duopoly with Airbus that would extend into the market for smaller planes, where manufacturers in Canada, China, Russia and Japan are emerging as competitive threats.

A tie-up with Embraer would expand Boeing’s manufacturing base outside the U.S. for the first time, while also marking a shift away from the Chicago-based company’s emphasis on handing cash back to investors through dividends and stock buybacks.

“To go and buy Embraer here would be a major change from what investors have been led to expect, and also seemingly endorse the Airbus/C-Series strategy that Boeing was so recently unenthused about,” Robert Stallard, an analyst at Vertical Research Partners, said in a note to clients.

The Brazilian government is already signaling opposition to a takeover, according to the newspaper Folha de Sao Paulo.

President Michel Temer won’t allow control of Embraer to change hands, he told Defense Minister Raul Jungmann and Air Force Commander Nivaldo Rossato on Thursday in a meeting, according to the Brazilian newspaper. The government was taken by surprise by the Journal’s report on the talks, the newspaper said.

Brazil’s ministries of defense and foreign affairs directed requests for comment to the finance ministry and the presidency. Neither immediately responded to inquiries from Bloomberg. Brazil retains a “golden share” in Embraer that guarantees government control in the event of threats to national sovereignty or security.

“With the Brazilian government having a say, it is worth asking what their upside would be from an American company buying the Brazilian A&D champion,” Stallard said, referring to aerospace and defense.

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.

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.

Boeing has focused on smaller acquisitions for the past two decades to expand its portfolio of commercial, military and space products. But Dennis Muilenburg, Boeing’s chief executive officer, and chief strategist Greg Smith, signaled a willingness to consider bolder moves this year when they promoted Kent Fisher, a rising star, to head the team that handles large mergers and strategic partnerships.

On Thursday, Boeing’s stock price closed at $295.03, down 0.96 percent. Embraer stock closed at $24.42 per share, up 22.10 percent.