Bid Dropped for Stake in McDonnell : Business: Taiwan Aerospace’s action deals a serious blow to U.S. firm’s plan to build a new jetliner.

McDonnell Douglas’ plan to build a new-generation passenger jet suffered a setback Monday when Taiwan Aerospace Corp. withdrew--at least for now--a proposal to buy a major stake in the U.S. company’s commercial aircraft business.

Instead of becoming a major investor in McDonnell’s Long Beach-based commercial aircraft division, the Taiwan company is offering to help obtain credit to finance production of 20 new MD-12 jetliners and perhaps invest only 5% to 10% in the business. Taiwan Aerospace officials also said they will hold off for two years before considering a bigger investment.

The new proposal marks a sharp departure from the original plan unveiled last November, in which Taiwan Aerospace would pay McDonnell up to $2 billion for a 40% ownership stake in its commercial jet business. McDonnell executives have said repeatedly that they need a major cash investment from abroad to pay for the MD-12s, which would be built in one of nine potential sites outside California.

Investors judged the new proposal harshly, bidding McDonnell stock down $4.635 a share, or nearly 10%, in New York Stock Exchange trading Monday. The shares closed at $43.50, off 46% from the peak of $80.50 that McDonnell shares traded at last fall when the Taiwan deal was unveiled.

McDonnell officials said in a statement Monday they will “insist that partners take an equity position to ensure the long-term success of the new company,” but they did not specify how much of a stake they would require.

John McDonnell, chairman of the St. Louis-based aerospace firm, said he “remains pleased with our progress to date.” He added that the firm is looking forward to further negotiations for “the formation of a global enterprise.”

Wolfgang Demisch, an aerospace analyst at UBS Securities, said the latest proposal by Taiwan Aerospace appears not to provide McDonnell with enough capital to undertake development of the new MD-12 jetliner or provide a sharing of risk in the project.

“If this is the Taiwan proposal, it is not one which is going to result in an airplane,” Demisch said.

However, the Taiwanese proposal could merely be a negotiating ploy, said David R. C. Chu, director of the Taiwan government’s aviation and space industry development committee. “After discussions with McDonnell Douglas, it’s possible that another plan may emerge,” Chu said.

McDonnell Douglas, which ranks as the world’s third-largest commercial aircraft manufacturer, has lost market share to both Boeing and Airbus Industrie in recent years. Its commercial jetliner business now is earning weak profits after years of major losses.

Under the new proposal, Taiwan Aerospace would head a consortium of Taiwanese investors who would provide a letter of credit to go toward purchase of 20 MD-12 jumbo jets from McDonnell, company officials said at a meeting Monday in Taipei.

McDonnell would reciprocate by having Taiwan Aerospace and its partners produce the MD-12’s wings and fuselage.

While the memorandum of understanding signed last November called for Taiwan Aerospace to purchase up to 40% of the Douglas Aircraft division, the new proposal has both sides retaining nearly full ownership of their own companies for the short term.

“If you can achieve all of your goals without giving up ownership of your company, why not do it?” said Taiwan Aerospace President Denny R.S. Ko. He said the new plan should not be viewed as a setback for McDonnell because it would allow the aircraft maker to get the cash it needs to develop the MD-12, provide a lower-cost labor force and guarantee a market for the new plane.

“If you believe in your company, you want to give up the minimum possible,” Ko said. “If you don’t believe in your company, you want to sell off as much as you can.”

Although Taiwan Aerospace’s board of directors expressed support for the new plan at a meeting on May 14, Ko said, the company has not formally presented the plan to McDonnell.

Taiwan Aerospace Chairman Earle J. S. Ho. insisted, however, that the scaled-down proposal should not catch McDonnell by surprise. “This is not a new concept,” he said. “In essence, they understand that we have had this idea.”

Under the new proposal, Taiwan Aerospace would consider acquiring only 5% to 10% of McDonnell’s commercial aircraft business, Ko said. But it might purchase up to 40% within two years if the MD-12 has a positive reception in the marketplace.

But the purchase of the 20 MD-12 planes would be contingent on McDonnell first getting orders for about 27 to 30 other MD-12’s, Ko said.

Taiwanese investors would set up a leasing company to purchase the 20 planes from McDonnell as well as a manufacturing company to produce the MD-12’s wings and fuselage. The cost of the local investment would be $2.5 billion, Ko said.

The new plan may help to alleviate concern by Taiwan Aerospace’s potential local partners about the risk of directly investing in McDonnell.

“If the MD-12 has problems, then we can use the new company to find other partners such as Airbus, Boeing or others,” Ko said. “This will increase investor confidence.”

Citing McDonnell’s previous financial difficulties, a government-sponsored evaluation of the proposal last month favored the deal but conceded that there were high risks involved when working with McDonnell.

Taiwan Aerospace is trying to round up private industry support for the project. At Monday’s meeting, company officials met with officials from 60 companies, including representatives from the airline, electronics and machinery industries.

Taiwan Aerospace hopes to form a negotiating task force with other private sector companies in the next few weeks to begin talks with McDonnell. While no firm decisions have been made, a show of hands at Monday’s meeting showed overwhelming support from private sector leaders for Taiwan Aerospace’s new proposal.

Taiwan’s government, which holds a 29% stake in Taiwan Aerospace, is taking mostly a hands-off attitude, claimed Vice Minister of Economic Affairs Yang Shih-chien.

Special correspondent Einhorn reported from Taipei and staff writer Vartabedian from Los Angeles.