Thursday, December 21, 2017

Boeing Confirms Takeover Talks With Brazilian Aircraft Maker Embraer: Boeing and Embraer have discussed a deal that would value Embraer at a big premium to its market value Thursday morning of some $3.7 billion



Boeing and Embraer have been discussing a deal that would involve a relatively large premium for Embraer. Shown, the new Embraer Phenom 300E corporate jet in an undated photo released October 9th.



The Wall Street Journal
By Dana Mattioli,  Dana Cimilluca and  Liz Hoffman
Updated Dec. 21, 2017 6:57 p.m. ET

Boeing Co. is in takeover talks with Brazilian aircraft maker Embraer SA, a move to fortify the U.S. aerospace giant against recent efforts by its greatest rival to move into the market for smaller passenger jets.

A deal would hand Boeing the largest maker of so-called regional jets that serve smaller airline routes, as well as access to Embraer’s well-regarded engineering workforce.

It is the latest salvo in the global competition between Boeing and Airbus SE, which recently announced a similar deal to take a majority stake in a jetliner program run by Canada’s Bombardier Inc., the second-largest maker of regional jets.

Boeing and Embraer confirmed the discussions Thursday after a Wall Street Journal report on the talks. The companies have been discussing a deal that would involve a relatively large premium for the Brazilian company, which had a market value of about $3.7 billion before it soared on the news, according to people familiar with the matter.

The parties are awaiting word from the Brazilian government on whether it would sign off on the combination, the people said. The government has a so-called golden share in Embraer that gives it veto power over such a transaction.

Embraer is a crown jewel of Brazilian industry, and it is far from guaranteed the government would sign off.

A deal would be the latest in a string of aerospace blockbusters that could remake the landscape for plane production around the globe.

In September, in the biggest aerospace deal in history, United Technologies Corp. agreed to buy airplane-parts maker Rockwell Collins Inc. for $23 billion. And Northrop Grumman Corp. agreed to buy rival defense contractor Orbital ATK Inc. for $7.8 billion in cash. Earlier this year, Rockwell closed on a deal to buy aircraft-seat maker B/E Aerospace.

To help entice the government, Boeing is willing to take steps to protect Embraer’s brand, management and jobs, one of the people said. It is also ready to structure a deal in a way that would protect the government’s interest in Embraer’s defense business, which already has a joint venture with Boeing.

Embraer’s U.S. shares soared on the Journal report Thursday—at one point rising by some 30%—and closed up 22%. Boeing was little changed.

Embraer, based in the city of São José dos Campos in the state of São Paulo, is the world’s third-largest commercial-jet manufacturer by revenue and has some 18,000 employees. It is best known for making regional jets in the 70- to 100-seat range, which are heavily used on routes where demand doesn’t warrant use of larger Boeing or Airbus planes. Its new E2 jet can carry up to 140 passengers.

Boeing’s smallest jet has around 130 seats. The company hadn’t previously indicated interest in smaller planes. Embraer’s defense offerings include the A-29 Super Tucano light-attack and advanced trainer aircraft and the KC-390 military cargo plane, which is marketed by Boeing as part of their joint venture.

Embraer also makes systems for border monitoring and surveillance.

Airbus recently announced plans to take a majority stake in Bombardier’s single-aisle CSeries jetliner, a struggling program that the European company thinks could have big potential.

That proposed deal comes amid a trade dispute between the U.S. and Canada over alleged state subsidies to Bombardier and would intensify competition between Airbus and Boeing. Boeing opposed the Airbus move, calling it “a questionable deal between two heavily state-subsidized competitors to skirt the recent findings of the U.S. government.”

The Commerce Department has proposed slapping Bombardier with a tariff that would quadruple the price of a CSeries aircraft in the U.S. after Boeing complained of predatory pricing and state subsidies. A final decision is expected next year. Brazil has also challenged Canada’s support for Bombardier before the World Trade Organization.

Embraer was founded in 1969 with help from the Brazilian government. When the government privatized the company in 1994, Embraer was unprofitable and saddled with over $200 million in debt.

Boeing, based in Chicago, is the world’s largest aerospace company with a market value of about $176 billion. It makes commercial jetliners and defense, space and security systems as well as military aircraft, weapons, satellites and helicopters.

Buying Embraer would also increase Boeing’s exposure to the market for business jets, which has been under pressure from sluggish sales since the financial crisis.

Under Chief Executive Dennis Muilenburg, Boeing has been cutting costs, in-sourcing more manufacturing and reducing pension liabilities. Its shares have soared this year as it has boosted cash generation and pledged to return $18 billion to stockholders over the next two years via buybacks.

It is expected to be one of the largest beneficiaries of tax reform, with analysts forecasting its effective tax rate will drop 10 percentage points to the upper teens. Some deal makers have speculated that companies that benefit from tax reform could earmark the proceeds for mergers and acquisitions.

—Ben Dummett, Doug Cameron and Robert Wall contributed to this article.

Original article can be found here ➤ https://www.wsj.com

2 comments:

Anonymous said...

The Canadian government did not sell Bombardier’s C-Series program until they were backed into a corner by Boeing with the United States trade action. Brazil and Embraer are comparatively under no such pressure; thus, I cannot see the government selling unless Boeing is offering a crazy premium. At what point is a deal not worth it, however.

Anonymous said...

This could explain why Boeing didn't replace the 737 with a new aircraft. Interesting to see where it goes, I would suspect this deal is going to have difficulty gaining approval, given Brazil's rather byzantine regulatory structures.