Boeing Moves Into Smaller Jets -- WSJ

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07/06/2018 | 06:47 am
Dennis Muilenburg


Brazilian plane maker Embraer agrees to sell U.S. company control of units for $3.8 billion



By Andrew Tangel and Robert Wall



This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 6, 2018).



Boeing Co. has agreed to take control of Embraer SA's commercial jetliner business, a deal that extends the U.S. aerospace giant's reach into the market for smaller passenger planes.



The agreement with the Brazilian company, cast as a joint venture valued at $4.75 billion, marks an extension of what has become effectively a global duopoly of Boeing and European rival Airbus SE for planes with more than 150 seats to even smaller jets. Now, the two aircraft makers are bracing for new competition in coming years from China and Russia, where aerospace companies are working on new single-aisle and wide-body planes



Chicago-based Boeing said Thursday that it will take an 80% stake in Embraer's commercial airplane and services business. Embraer will own the remaining 20%, with the right to force Boeing to buy it out over the next decade.



Boeing will pay its new partner $3.8 billion in cash once the deal closes, Embraer executives said. Embraer will also commit cash and debt to the commercial joint venture, they said, without providing more details. The executives said the two sides are also exploring a joint venture for defense products.



Boeing shares, which are up 13% this year, were little changed on Thursday, while Embraer's shares fell 14% as analysts said investors were expecting a higher purchase price. The Wall Street Journal reported in December that Boeing and Embraer were in takeover talks.



The deal also must survive the political uncertainty besetting Brazil in the run-up to presidential elections in October. While Embraer would retain a significant stake in the business at the outset, the prospect of exiting a commercial aircraft sector developed with government funding over nearly 50 years would be controversial.



Boeing Chief Executive Dennis Muilenburg said the Embraer partnership fits his company's strategy to make investments "that enhance and accelerate our growth plans." Embraer is best known for making regional jets in the 70- to 100-seat range, used heavily on routes that don't warrant larger Boeing or Airbus planes.



Boeing wants the added scale to compete against Airbus as its European rival moves into the market for small jets. It also said the joint venture, which will be run from Embraer's base in Brazil, would create about $150 million in annual pretax cost savings by its third year.



Embraer executives envision Boeing's global network of airline customers helping to generate new sales for Embraer jets. That marketing clout has become more important to the Brazilian company since Airbus said in October that it would make some smaller passenger jets with Canada's Bombardier Inc.



Airbus, which is also looking for efficiencies, on Sunday completed its takeover of the Bombardier unit that makes the Canadian company's CSeries narrow-body planes.



The larger version of the CSeries plane, the CS300, seats around 140 people and competes with smaller versions of Airbus and Boeing narrow-bodies. The 120-seat CS100 competes with Embraer's largest plane.



The CSeries has struggled against those rivals, garnering just 400 orders since it was introduced a decade ago.



Airbus believes it can boost CSeries sales in what it estimates to be a market for about 6,000 planes of that size. Airbus is expected to announce some airline commitments for the CSeries at the annual Farnborough Air Show outside London, which is set for this month.



Aerospace executives have said the partnership between Airbus and Bombardier spurred other companies to pursue their own joint-venture talks.



"It's in Embraer's best interest to get a deal done," said Carter Copeland, an analyst at Melius Research. "Their commercial business faces a pretty big challenge."



Boeing and Embraer had been working to assuage the Brazilian government's concerns that the deal would compromise the independence of Embraer's defense business. Also, workers at Embraer plants in Brazil have protested over the deal in recent months.



Jair Bolsonaro, a former army captain who is leading in polls ahead of presidential elections scheduled for October, supports the deal. But center-left rival Ciro Gomes and the Brazilian Workers' Party oppose it, exposing the joint venture to considerable uncertainty ahead of what is expected to be Brazil's most unpredictable elections in decades.



Boeing and Embraer said Thursday that they will create a separate joint venture "to promote and develop new markets and applications for defense products and services," such as Embraer's KC-390 military transport jet. Embraer executives said the Brazilian company would have a majority interest in the defense unit but that the details haven't been worked out.



Embraer, which is based in the state of São Paulo, has been a cornerstone of Brazil's manufacturing sector for almost 50 years. The company is the world's third-largest commercial-jet manufacturer by revenue and has some 18,000 employees.



Boeing is the world's largest aerospace company with a market value of about $194 billion and an order backlog of about 6,000 jets valued at more than $400 billion. It makes commercial jetliners and defense, space and security systems as well as military aircraft, weapons and satellites.



The deal, which the companies said isn't binding, is expected to close by late 2019 pending regulatory approval.



--Jeffrey T. Lewis contributed to this article.



Write to Andrew Tangel at Andrew.Tangel@wsj.com and Robert Wall at robert.wall@wsj.com



Corrections & Amplifications Boeing's CEO is Dennis Muilenburg. An earlier version of this article incorrectly spelled his surname as Muilenberg. (July 5, 2018)





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