Boeing Scraps $4.2 Billion Embraer Deal as Market Shrinks
(Bloomberg) -- Boeing Co. is walking away from its proposed $4.2 billion combination with Embraer SA’s commercial-aircraft business, ending years of talks, as the planemakers brace for a far smaller jetliner market after the coronavirus pandemic.
The deal’s collapse turns two long-time business partners into competitors and strengthens Airbus SE’s long-term advantage in the lucrative market for single-aisle planes. The partnership with Brazil’s Embraer would have armed the U.S. aerospace giant with smaller jets to compete against a new offering from Airbus.
Boeing is abandoning the proposed tie-up weeks after Chief Executive Officer Dave Calhoun warned employees that the company would need to adjust to a “new reality” as travel demand vanishes because of the virus and airlines prepare for a slow recovery. Embraer’s market value has tumbled to less than $1.1 billion, about a quarter of what Boeing had been poised to pay for the Brazilian company’s commercial plane operations alone.
Continued negotiation “is not going to resolve the outstanding issues,” Marc Allen, Boeing’s president of Embraer Partnership & Group Operations, said in a statement Saturday. “It is deeply disappointing.”
Embraer responded that Boeing “wrongfully terminated” the agreement and that it plans to seek all remedies against Boeing for damages. Boeing faces a $100 million termination penalty for scrapping the deal, while Embraer’s maximum penalty is $75 million.
Boeing and Embraer will also junk 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.
Reversal of Fortune
The economic collapse from the Covid-19 outbreak has upended several big corporate transactions that, like the Boeing-Embraer combination, were thought to be done deals.
Sycamore Partners moved this week to terminate its purchase of a majority stake in Victoria’s Secret. Stein Mart and Kingswood called off their merger earlier this month, citing the unpredictable economic conditions. And directors of We Co. sued Softbank Group Corp. in Delaware over its decision to pull out of a $3 billion stock purchase.
The Boeing-Embraer combination had been expected to close last year and breezed through regulatory approvals until the European Commission began its antitrust review. European regulators signaled earlier this week that their review of combining two of the world’s three largest planemakers would likely continue through August.
Both the commercial landscape and Boeing’s balance sheet are far different from late 2017, when talks for the original partnership with Embraer began in earnest.
At the time, the U.S. manufacturer was flush with cash and eager to tap Embraer’s engineers to help design a new, midrange jet family that was on Boeing’s drawing board.
More than two years later, Boeing has scrapped its product-development plans as its reputation and finances have been battered by two deadly crashes of the 737 Max, the company’s best-selling jet.
The Chicago-based company is now trying to preserve cash as it deals with plummeting demand for jet sales and at least $19 billion in costs for the Max, which has been grounded more than a year. It’s also weighing a request for billions of dollars in government aid.
Preserving $4 billion or so would mean “a nice chunk of liquidity” for Boeing, Richard Aboulafia, an aerospace analyst at Teal Group, said in an interview before the Embraer talks fell apart.
Embraer will be left to face the tumultuous market and compete with Airbus without relying on Boeing’s deeper pockets. Brazil’s industrial jewel had $2.78 billion of cash, equivalents and financial investments at the end of the year, down from $3.21 billion a year earlier. Net debt increased 39% to $612.4 million.
Embraer’s sales have also slumped due to uncertainty over the status of the Boeing venture. The Sao Jose dos Campos, Brazil-based company delivered 89 commercial jets last year, one fewer than the year before. Total sales climbed 7.7% to $5.46 billion on increased revenue from Embraer’s business in private jets, defense and services.
The slow commercial-plane sales stand in contrast to Airbus’s competing A220, which is “starting to really get traction” with blue-chip customers such as Delta Air Lines Inc., Aboulafia said. The European planemaker took control of the jet program from Canada’s Bombardier Inc. in 2018.
Embraer, meanwhile, is still trying to establish its upgraded E2 generation of jets in the market.
“The E2 still has not hit the mainline carriers the way the A220 is starting to,” Aboulafia said. “Why? The answer was they were waiting for the Boeing deal to be inked, which was possibly the correct response.”
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