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Embraer, Boeing deal approved by the new Brazilian government

25th January 2019

By: Rebecca Campbell

Creamer Media Senior Deputy Editor

     

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The Brazilian government has approved the creation of two joint ventures (JVs) between Brazilian aerospace company Embraer and US aerospace group Boeing. The Brazilian government holds a “golden share” in the originally State-owned Embraer, giving it power of veto over mergers, takeovers, and any other major changes within the company.

On January 11, the day after government gave its go-ahead for the deal, Embraer’s board of directors ratified its previous agreement of the transaction. The partnership between the two aerospace groups would “position both companies to accelerate growth in global aerospace markets,” stated Embraer in its press release. “The closing of the transaction will be subject to shareholder and regulatory approvals and customary closing conditions. Assuming the approvals are received in a timely manner, the transaction is intended to close by the end of 2019.” Embraer will maintain full ownership of its business aviation and all its other defence, security, systems and space businesses.

The first JV covers Embraer’s commercial aviation products, centred on its E-Jet and upgraded E-Jet E2 families of 70-seat to 146-seat airliners, but also including its 37-seat to 50-seat ERJ regional jet family. The E-Jet family has four members – from smallest to largest, the E170, the E175, the E190 and the E195. The E-Jet E2 family has three members: the E175-E2, the E190-E2 and the E195-E2.Compared with the original E-Jets, the E-Jet E2 family has new-generation engines, new avionics, new-generation fly-by-wire controls, a new undercarriage, a new horizontal stabiliser (tailplane) and new wings. (Nevertheless, it takes only two-and-a-half days for an E-Jet qualified pilot to become qualified on an E-Jet E2.)

This JV will be 80%-owned by Boeing, for which the US group will be paying $4.2-billion (reportedly some 10% higher than its original offer), and 20% by Embraer. This JV is currently being referred to as NewCo.

The second proposed JV covers Embraer’s KC-390 multirole tanker-transport aircraft. This would be 51%-owned by Embraer and 49% by Boeing. The purpose of the KC-390 JV would be to help capture global market share in a competitive international market; gain access to both the US market and US sales channels (such as the Foreign Military Sales and Foreign Military Financing programmes); maintain the capabilities of the Brazilian defence industry; consolidate the financial results and governance of Embraer; and provide customers with more competitive solutions.

“The final proposal preserves national sovereignty and interests,” stated the note issued by the Brazilian Presidency (more usually referred to as the Planalto, after the Presidential office building in Brasília, the Planalto Palace). Recently inaugurated Brazilian President Jair Bolsonaro indicated that it was not in the interests of the country to drag out the process of creating the JVs.

The two companies gave the Brazilian government a number of assurances regarding the JVs. These included that there would be no changes in ownership; Brazil’s strategic interests would be maintained and the golden share unconditionally respected; all defence projects now under way would be maintained; the production of the aeroplanes that had already been developed would be kept in Brazil; and the secrecy and priority of national defence projects would be maintained. The other assurances were that the current number of jobs in Brazil would be maintained; the capabilities of Embraer’s current engineering force would be kept; Embraer would receive its fair (20%) share of dividends from NewCo and would get its royalties for the KC-390 (and the A-29 light attack aircraft, although this is not included in either of the JVs); and Embraer would make an initial investment of some $1-billion (presumably in NewCo).

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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