EMBR3 Embraer SA

U.S. jet maker moves to save cash by aborting joint ventures after pandemic halted travel

By Doug Cameron 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 27, 2020).

Boeing Co. said it dropped plans to take control of the jetliner business of Brazil's Embraer SA, saving around $4 billion in much-needed cash but adding further uncertainty to its own product strategy.

The U.S. aerospace giant said Saturday the companies failed to agree to final terms by the initial termination date and opted to walk away from the two planned joint ventures announced in 2018, which had already been delayed by some competition regulators.

Boeing had pursued Embraer to acquire access to smaller jetliners seating around 100 passengers and engineering expertise, but the Brazilian company's market value has fallen by two-thirds since the start of the year as the coronavirus upended air travel and led to the grounding of much of the global airline fleet.

The companies didn't detail what conditions weren't met. Boeing doesn't expect to have to pay a break fee -- which varied from $75 million to $100 million in the original contract -- according to people familiar with the situation.

"We all aimed to resolve those by the initial termination date, but it didn't happen," said Marc Allen, who headed Boeing's team on Embraer integration.

Embraer said Boeing had wrongfully terminated the agreement and used false claims as a pretext to avoid its commitments to close the transaction. The Brazilian company said that it intends to use all remedies available regarding the damages incurred by Embraer because of Boeing's decision.

"We believe Boeing has engaged in a systematic pattern of delay and repeated violations of the [purchase agreement], because of its unwillingness to complete the transaction in light of its own financial condition and 737 MAX and other business and reputational problems."

Boeing had agreed to pay $4.2 billion in cash for an 80% stake in Embraer's commercial business, which focused on small regional jetliners, as well as a 49% stake in a unit producing a new military cargo jet. Boeing said it still wanted to continue a joint marketing deal involving Embraer's military cargo jet.

"Boeing argues in its statement that the withdrawal occurred due to unsatisfactory conditions in the final negotiations, but our view is that the economic crisis that is starting globally could hurt companies in the sector and retaining liquidity is the most sensible path at the moment," said Pedro Galdi, an analyst at São Paulo-based brokerage Mirae Asset.

The U.S. company last year raised funds for a deal it had hoped to close by the end of 2019, only for European antitrust regulators to voice objections. Their probe wasn't due to conclude until August.

Boeing had redirected the funds from last year's bond issue and has been raising more funding to address the liquidity squeeze from the grounding of the 737 MAX and the collapse in air travel, which has left airlines unable or unwilling to take new aircraft.

Rival Airbus SE moved into the small-jetliner business by acquiring an aircraft program from Canada's Bombardier Inc.

Boeing's aircraft-development program had already been derailed by the prolonged grounding of the MAX, following two fatal accidents. Boeing also shelved plans for a new midsize jet to focus on returning the MAX to commercial service.

--Jeffrey T. Lewis contributed to this article.

Write to Doug Cameron at doug.cameron@wsj.com

(END) Dow Jones Newswires

April 27, 2020 02:47 ET (06:47 GMT)

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