Aircraft makers Boeing and Embraer are racing to win Brazilian government approval for their proposed $4.75bn joint venture as Latin America’s largest country heads for presidential elections that are the most unpredictable in decades.
Analysts praised US-based Boeing’s proposed acquisition of 80 per cent of Brazilian Embraer’s regional commercial jet and services operation, announced on Thursday. The deal sets the partners up for a fair fight with Europe’s Airbus and Canada’s Bombardier in the growing regional jet segment, they said.
But the analysts’ warm words were starkly contrasted by reaction from some politicians in Brazil, where populists from the left and right are leading in early polls for October’s presidential election, suggesting the deal faces significant risks — especially if it is not formally approved before the business-friendly centre-right government of President Michel Temer leaves office on January 1.
“This is a disaster,” said Paulo Pimenta, leader of the leftist Workers’ party in Brazil’s lower house of congress. “It’s yet another action sponsored by a government, that of Michel Temer, that is illegitimate and at the end of its mandate, which runs against the sovereignty of the country.”
Mr Temer, who is not standing for re-election, has been seen as likely to use the government’s golden share in Embraer to support the partnership. The company said it expected to have the approval by November. But it did not put that promise in the deal documents published on Thursday, which said only that the deal would close by the end of 2019.
“If a more nationalistic candidate enters, you could have difficulties with realising the joint venture,” said Sérgio Lazzarini, a professor at Insper business school in São Paulo.
The deal is the latest in a series of moves that are reshaping the global aerospace landscape, as Boeing and Europe’s Airbus enter the market for smaller regional jets alongside new potential rivals from China, Russia and Japan.
Under the deal, Boeing would take an 80 per cent stake valued at $3.8bn in a joint venture containing Embraer’s regional commercial jet manufacturing and services business. Embraer would retain the remaining 20 per cent, with an option to sell it to Boeing. Both companies would be subject to a 10-year lock-up period on shares in the joint venture.
The deal carves out the most politically sensitive defence business. Embraer would retain 100 per cent of its defence and security unit, although the two companies would create another joint venture to “promote and develop new markets and applications for defence products”. Those products are led by the new KC-390 jet transport aircraft Embraer is developing to compete with the C-130 Hercules made by Lockheed Martin.
Analysts said Embraer needed the deal to maintain its lead in the market for regional jets with up to 150 seats. Embraer controlled 28 per cent of this market compared with 12 per cent for Boeing, and 16 per cent and 25 per cent respectively for Airbus and Bombardier, Jefferies said in an analyst note.
The deal would also help Embraer secure more customers who might previously have worried about geopolitical and financial risk in its operations related to Brazil, said Jim Corridore of CFRA research.
For Boeing, the combination contained “sound strategic rationale” by expanding its reach in the lower end of the commercial aircraft market aircraft, Jefferies said.
The price was fair for Boeing, representing about 8.5 times earnings before interest, taxation, depreciation and amortisation, according to Robert Stallard of Vertical Research Partners. “We don’t view the Embraer deal as a ‘game-changer’ for Boeing but it is still a positive development,” he said.
Other analysts noted, however, that for Embraer shareholders, the price was lower than expected, leading to a drop in Embraer stock on Thursday.
Renato Mimica of Banco BTG Pactual said he expected Embraer shareholders to demand a higher price given the commercial jet operation's strategic value.
But such considerations might be the least of Boeing and Embraer’s problems if they could not secure formal government approval for the deal this year, analysts said.
Politicians on Brazil’s left, in particular, would be reluctant to cede control of the regional jet operations of Embraer, they said. The company is the world’s third-largest commercial jet-maker and an industrial champion in a country traditionally suspicious of moves to reduce state control of industry.
Leading the early polls in Brazil’s election is a former army captain, far-right politician Jair Bolsonaro. He might approve the deal given that defence was ringfenced against possible foreign meddling.
But the leading candidate from Brazil’s centre left, Ciro Gomes, has already publicly opposed the deal. “Embraer, we will take it back,” he was quoted by local newspaper Valor Economico as saying in March.
Indeed, Mr Stallard, of Vertical Research Partners, said in his note: “It’s not over till it’s over.” With closure of the deal still far away, he was not changing his earnings forecasts for Boeing.
“With an election due in Brazil later this year, a change in government could also have ramifications for the deal.”
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