Boeing’s (BA, Financial) interest in joining forces with Embraer (ERJ, Financial) has been making headlines ever since the American aircraft manufacturer expressed its interest in acquiring the Brazilian plane maker. According to O Global newspaper, Boeing is acquiring 51% stake in a joint venture deal with Embraer, the details of which are being currently chalked out.
Earlier during the month, the local Brazilian media reported the progress on the deal wherein Boeing proposed to form a joint venture arrangement with Embraer for commercial jets, which excludes the defense business of the latter. Let’s look into the details to get a better sense of the impending deal.
Meeting the demand
Boeing has pursued the Brazilian government’s authorization for its partnership proposal with Embraer, which would make a new enterprise concentrating on commercial aviation. However, the Chicago-headquartered company failed to receive a go-ahead from the Brazilian government on its initial attempt to absorb Embraer. The reason being, the government was apprehensive about letting a foreign company control the defense unit of the company as it could mean compromising on the strategic security of the nation.
The government holds major share in Embraer, formerly a state enterprise, which grants it a veto power on all strategic decisions, including Boeing's tie-up effort.
Late last week, Brazilian Defense Minister Raul Jungmann said that Boeing has understood the reason behind Brazil's disagreement on parting control over Embraer. As such, negotiations on the formation of a third company is well in progress.
Both Boeing and Embraer preferred not to comment on this subject matter. The defense unit of Embraer has been the sticking point in the deal. Having said that, Boeing has reportedly agreed to the Brazilian governments’ justified demand. The new company would only deal in commercial aviation and will have nothing to do with Embraer’s defense unit.
About the deal
According to The Valor Economico newspaper, the deal with Embraer would give Boeing an 80% to 90% stake in the newly formed company focusing only on commercial jet business.
This new collaboration will help Boeing to become the leader in the smaller passenger jet market. Currently Embraer is the third largest global plane maker and leads the 70-seat to 130-seat regional aircraft market. This arrangement with Embraer will help extend Boeing’s offerings from narrow body and wide body jet to regional planes as well. Considering the growing market for smaller jets, this will be a great deal for the company. Besides, Boeing will be able to effectively compete with Bombardier’s (BDRAF, Financial) CSeries jets, which is currently backed by archrival Airbus (EADSY, Financial).
Boeing’s CEO Dennis Muilenburg said "now seems to be a good time to combine forces" and the company is "containing to work through that agreement, we still have work to do," at the recently held Citi Industrials Conference in Miami.
Muilenberg said that the company is very close to concluding the agreement and that it would be a "great strategic fit, but not a must do." The company’s interest in the deal comes at a time when the midmarket plane segment is growing. Boeing’s endeavor to enter this market through this strategic move should pay off.
Disclosure: I do not hold any position in the stocks mentioned in this article.
