Boeing and Embraer have discussed deal that would value Embraer at a big premium to its market value Thursday morning of some $3.7 billion
Boeing Co. has been in takeover talks with Brazilian aircraft maker Embraer SA, a move that would strengthen Boeing’s hand in the regional jet market and help it counter a recent move by Airbus SE to strike a similar deal.
Boeing and Embraer have been discussing a deal that would involve a relatively large premium for Embraer, which had a market value of about $3.7 billion Thursday morning, according to people familiar with the matter. The talks are on hold as the parties await word from the Brazilian government on whether it would sign off on the combination. The government has a so-called golden share in Embraer that gives it veto powers over such a transaction.
Embraer is a crown-jewel of Brazilian industry, and it’s far from guaranteed the government would sign off; therefore there’s an even higher probability than in a typical merger negotiation that there won’t be any deal. Indeed, some of the people cautioned it is unlikely the talks will be revived.
In order 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’s also willing to structure a deal in a way that would protect the government’s interest in Embraer’s defense business.
Embraer, based in Sao Paulo, is the world’s third-largest commercial-jet manufacturer, according to its website, and has around 18,000 employees. The company 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 operating larger Boeing or Airbus planes. That is an area of relative weakness in Boeing’s portfolio where the company is eager to bulk up.
Embraer’s defense offerings include the A-29 Super Tucano light-attack and advanced trainer and the multi-mission KC-390 military airlift. The company also makes integrated systems for border monitoring and surveillance.
Airbus recently announced plans to take a majority stake in a joint venture with Bombardier Inc. of Canada that builds the single-aisle CSeries, a struggling program that the European company thinks could have big potential.
That proposed deal, which would represent a major shake-up of the commercial-jetliner business, 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. A final decision is expected next year.
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. Earlier that decade, it had poured copious efforts into the CBA 123, an innovative 19-seat propeller aircraft, but buyers balked at the steep price and it didn’t sell a single one.
Boeing, founded in 1916 and based in Chicago, is the largest aerospace company in the world. It makes commercial jetliners and defense, space and security systems. Besides commercial planes, the company, which has a market value of about $177 billion, makes military aircraft, weapons, satellites and launch systems.
Boeing is expected to be one of the largest beneficiaries of tax reform, with analysts forecasting that 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 acquisitiions.
This has been a busy year for deals in the aerospace sector. In September, United Technologies Corp. agreed to buy airplane-parts maker Rockwell Collins Inc. for $23 billion, in the biggest aerospace deal in history. Earlier this year, Rockwell closed on a deal to buy B/E Aerospace. In September, Northrop Grumman Corp. agreed to buy rival defense contractor Orbital ATK Inc. or $7.8 billion in cash.
—Ben Dummett contributed to this article.