Business / Corporate

Embraer takes Boeing to arbitration over failed deal as Brazil eyes China tie-up

REUTERS

Brazil's Embraer SA says it has begun an arbitration process against Boeing Co, after the U.S. aerospace giant abruptly canceled a $4.2 billion (¥451 billion) deal over the weekend that had been years in the making.

The deal's collapse was not well-received by investors, who appeared to have hoped until the last minute that the takeover would not fall apart. Boeing shares fell to an eight-year low.

But Brazil's government, which used to own Embraer and is still the company's biggest military client, took a more upbeat tone. It views China as a potential new partner for the plane manufacturer, even though several senior Brazilian government figures have attacked the Chinese government recently.

Vice President Hamilton Mourao, a retired army general, called the turn of events a "blessing in disguise."

"We have the know-how, they have the demand," Mourao said of China. "This shows once again that a marriage (with China) needs to continue, because it is an inevitable marriage."

The deal's sudden collapse was triggered by a midnight deadline that Boeing refused to extend on Saturday, and drew an irate response from Embraer.

Embraer is in a delicate situation, having bet the company's future on Boeing only to find itself now in isolation and without a Plan B, all while the COVID-19 crisis ravages the travel industry.

On Monday, Embraer executives hosted a call with analysts but largely dismissed the angry rhetoric displayed over the weekend.

Embraer tried to reassure investors that it remains a solid company, although CEO Francisco Gomes Neto acknowledged that 2020 would be a "tough" year and that 2021 would be "worse than we had thought."

He added that Embraer had been able to find $1 billion in cash savings for 2020, and that it had not suffered any aircraft order cancellations due to the virus crisis.

Gomes Neto declined to provide more details on the arbitration process and whether it would be accompanied by a lawsuit in either a Brazilian or a U.S. court.

Embraer had hoped to sell 80 percent of its profitable aviation unit to Boeing and benefit from the U.S. company's marketing power to scale up sales of its E2 regional jets, lauded for their fuel-efficiency but also a sales laggard. It would have then used Boeing's cash to wipe out all of its previous debt and pay a $1.6 billion dividend to shareholders.

Boeing, meanwhile, was aiming to compete more directly with Airbus in the regional jets segment.

Embraer maintains a close relationship with the Brazilian government, which kept veto power over strategic decisions at the company following its privatization.

President Jair Bolsonaro also said Monday that Embraer might be ripe for exploring new buyers.

"Maybe we'll begin new negotiations with a new company," Bolsonaro told reporters.

A former army captain, Bolsonaro had supported and approved of the Boeing deal even as others in the military remained suspicious that Boeing's involvement could affect Brazilian interests.

Gomes Neto did not rule out a potential new sale to a different company but declined to comment further. He joined Embraer only a year ago and was not a part of the executive team that drew up the deal with Boeing.

On Monday, UBS also suggested China may be interested in buying up Embraer's commercial planes.

"We believe China still aspires to a global aerospace leadership position and, in our view, (Embraer) would bring both the talent for design and development," it said in a client note.

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