Boeing and Embraer sign $ 4.2 billion deal with shrinking market

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(Bloomberg) – Boeing Co. moves away from $ 4.2 billion plan to combine commercial aircraft operations with Embraer SA, ending years of talks as planners prepare to a much smaller airliner market after the coronavirus pandemic.

The collapse of the agreement turns two long-time business partners into competitors and strengthens Airbus SE’s long-term advantage in the lucrative single-aisle aircraft market. The partnership with Embraer in Brazil would have armed the American aerospace giant with smaller jets to compete with a new Airbus offering.

Boeing abandons proposed merger weeks after CEO Dave Calhoun warned employees that company should adjust to “new reality” as travel demand wanes due to virus and companies are preparing for a slow recovery. Embraer’s market value fell to less than $ 1.1 billion, about a quarter of what Boeing was willing to pay for just the operations of the Brazilian company’s commercial aircraft.

The continuation of negotiations “will not solve the outstanding problems,” said Marc Allen, president of Boeing at Embraer Partnership & Group Operations, in a statement on Saturday. “It is deeply disappointing. “

Embraer responded that Boeing had “improperly terminated” the agreement and that it intended to seek compensation from Boeing for damages. Boeing is fined $ 100 million for terminating the deal, while Embraer’s maximum penalty is $ 75 million.

Boeing and Embraer will also join a second venture to sell Embraer’s C-390 Millennium. The companies will maintain an existing agreement, signed in 2012 and expanded in 2016, to market and support the military cargo aircraft.

The reverse of fortune

The economic collapse of the Covid-19 epidemic has disrupted several important business deals that, like the Boeing-Embraer combination, were slated to close.

Sycamore Partners decided this week to end its purchase of a majority stake in Victoria’s Secret. Stein Mart and Kingswood canceled their merger earlier this month, citing unpredictable economic conditions. And the directors of We Co. sued Softbank Group Corp. in Delaware for its decision to opt out of a $ 3 billion stock purchase.

The Boeing-Embraer combination was scheduled to close last year and has been approved by regulatory authorities until the European Commission begins its antitrust review. European regulators said earlier this week that their review of the combination of two of the world’s three largest automakers is likely to continue until August.

Boeing’s business landscape and track record are both very different from the end of 2017, when discussions for the initial partnership with Embraer began in earnest.

At the time, the American automaker was strapped for cash and eager to call on Embraer’s engineers to help design a new family of mid-range jets that were on the drawing board of Boeing.

More than two years later, Boeing abandoned its product development plans because its reputation and finances were damaged by two fatal crashes in the company’s 737 Max, the company’s best-selling aircraft.

Preserve cash

Chicago-based company is now trying to conserve cash as it faces declining demand for aircraft sales and at least $ 19 billion in costs for the Max, which has been immobilized for more than a year. It also weighs on a demand for billions of dollars in government aid.

Preserving around $ 4 billion would mean “a good deal of liquidity” for Boeing, Richard Aboulafia, aerospace analyst at Teal Group, said in an interview before Embraer’s talks collapsed.

Embraer will face the tumultuous market and compete with Airbus without relying on the deeper pockets of Boeing. Brazil’s industrial gem had $ 2.78 billion in cash, cash equivalents and financial investments at the end of the year, up from $ 3.21 billion a year earlier. Net debt increased 39% to $ 612.4 million.

Embraer’s sales also fell due to uncertainty about the status of the Boeing business. Brazilian company Sao Jose dos Campos, based in Brazil, delivered 89 commercial aircraft last year, one less than the previous year. Total sales climbed 7.7% to $ 5.46 billion on the back of higher revenues from Embraer’s activities in private aircraft, defense and services.

Airbus “Traction”

The slow sale of commercial aircraft contrasts with the Airbus A220, which “is starting to really gain ground” with blue-chip customers such as Delta Air Lines Inc., said Aboulafia. The European aircraft manufacturer took control of Bombardier Inc.’s jet aircraft program in Canada in 2018.

Embraer is still trying to establish its improved generation of E2 jets on the market.

“The E2 has still not reached the major carriers as the A220 begins,” said Aboulafia. ” Why? The answer was that they were waiting for the Boeing agreement to be signed, which was perhaps the correct answer. “

(Adding an Embraer declaration to the fifth paragraph)

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