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Boeing takes control of Embraer's commercial jet business in $4.75-billion deal

Boeing takes control of Embraer's commercial jet business in $4.75-billion deal
Boeing Co. is forming a $4.75-billion venture with Brazilian jet-maker Embraer that will bolster the Chicago company's regional jet business. (Associated Press)

Boeing Co. is forming a $4.75-billion venture with longtime industrial partner Embraer SA, a move that will bolster its arsenal in the newest battlefront with Airbus SE: the market for smaller jetliners.

Under a preliminary deal, Boeing will own 80% of a partnership controlling Embraer’s commercial airplane and services businesses while the Brazilian manufacturer holds 20%, the companies said in a statement Thursday. The tie-up caps years of talks between the two, while extending the duopoly held by Boeing and Airbus as competitive threats emerge from rivals in Russia, Japan and China.

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By adding Embraer’s E-Jet family to its portfolio, Boeing will expand its manufacturing base abroad while extending its reach into the market for 100-seat planes. Airbus took control of Bombardier Inc.’s C Series jet on July 1, through a joint venture with the Canadian manufacturer it forged with no out-of-pocket cost. Boeing was left without a comparable offering, while Embraer — Bombardier’s main rival — faced a tough new competitor in Airbus’ global marketing organization.

“The agreement with Boeing will create the most important strategic partnership in the aerospace industry, strengthening both companies’ leadership in the global market,” Embraer Chief Executive Paulo Cesar de Souza e Silva said in the statement.

Embraer shares dived 14.3% in Sao Paulo. Analysts had speculated that the commercial airplane unit would fetch a higher price than the $3.8-billion valuation for Boeing’s stake in the venture. Embraer had surged 35% this year through Wednesday on anticipation of the deal.

“The valuation was lower than we expected, but we see a 20% upside to yesterday’s closing [stock] price,” BTG Pactual analyst Renato Mimica said in a note.

Boeing edged up 0.1% to $333.18 in New York. Through the close of trading Tuesday, the shares had gained 13% this year, the fourth-best performance among the 30 members of the Dow Jones industrial average.

“This important partnership clearly aligns with Boeing’s long-term strategy of investing in organic growth and returning value to shareholders, complemented by strategic arrangements that enhance and accelerate our growth plans,” Boeing CEO Dennis Muilenburg said in the statement.

Embraer, a jewel of Brazilian industry, will remain a separate company that makes military and private jets while reaping a revenue stream from the new partnership. The structure, along with the company’s flagging sales and an increasingly challenging market, helped win the support of the Brazilian government.

Boeing and Embraer said they plan to form a second joint venture to develop new markets for defense products and applications that bolster the Brazilian company’s military portfolio, including its KC-390 cargo aircraft.

The commercial venture will be run by a Brazil-based CEO and management team, while Muilenburg will have ultimate control. The companies expect to finalize the agreement over the next several months, and close the deal by the end of next year after securing regulatory approval. The partnership is expected to add to Boeing’s earnings beginning in 2020.

For years, Boeing and Airbus focused on larger, more-profitable jetliners and shifted away from the smaller planes, which have similar development costs but sell for lower prices. Airbus’ deal with Bombardier and Boeing’s pact with Embraer signal that the big plane-makers intend to deny a foothold in the lucrative narrow-body market to ambitious newcomers, such as Commercial Aircraft Corp. of China.

Embraer brings engineering talent that Boeing could tap for the new midrange jet on its drawing board, dubbed the 797 by analysts. Embraer also has lower-cost production capabilities that the Chicago-based plane-maker could use to build components such as actuators and landing gear as it brings more supplier work in-house, said Canaccord Genuity analyst Ken Herbert.

The Brazilian company has overtaken Bombardier as the largest manufacturer of regional jets while burnishing its reputation for engineering prowess. In an industry where product delays are the norm, Embraer has introduced 10 all-new aircraft over the past 15 years, largely on-budget and on-time, Ron Epstein, an analyst at Bank of America Corp., wrote earlier this year.

The plane-maker, based in the city of Sao Jose dos Campos, debuted the first of its E2 family of upgraded jets this year. The E190-E2 competes directly with Bombardier’s smallest C Series, seating as many as 114 travelers and powered by the same Pratt & Whitney geared turbofans as the Canadian jet.

Created in 1969 by the Brazilian government and privatized in 1994, Embraer has been touted as a source of national pride for the commodities-driven country and an example of efficiency and innovation, though corruption scandals in the past few years have tainted that image.

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4 p.m.: This article was updated with stocks’ closing prices.

This article was originally published at 8:25 a.m.

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