Embraer taking Boeing to arbitration

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Brazil’s Embraer started arbitration against Boeing after the US aircraft manufacturer cancelled a $4.2 billion deal years in the making at the weekend.

The deal’s collapse was not well received by investors who appeared to hope until the last minute the takeover would not fall apart. Boeing shares fell to an eight year low before paring losses and closing 7.5% lower.

The Brazil government, which used to own Embraer and is still the company’s largest military client, was more upbeat. It eyes China as a potential new partner, even as several senior Brazilian government figures recently attacked the Chinese government.

Brazil 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 marriage (with China) needs to continue, because it is inevitable.”

The deal’s sudden collapse was triggered by a midnight deadline 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 to find itself now in isolation and without a Plan B, all while the coronavirus crisis ravages the travel industry.

On Monday, Embraer executives hosted a call with analysts and largely dismissed the weekend’s angry rhetoric.

Embraer attempted to reassure investors it remains a solid company, although CEO Francisco Gomes Neto acknowledged 2020 would be “tough” and 2021 would be “worse than we thought.”

He added Embraer found $1 billion in cash savings for 2020 and it has not suffered aircraft order cancellations due to coronavirus.

Gomes Neto declined to provide more details on the arbitration process and if it will be accompanied by a lawsuit in either a Brazilian or a US court.

Embraer hoped to sell 80% of its profitable aviation unit to Boeing and benefit from the US company’s marketing power to up sales of its E2 regional jet, lauded for fuel efficiency but a sales laggard. It would then use Boeing cash to wipe out previous debt and pay a $1.6 billion dividend to shareholders.

Boeing aims to compete more directly with Airbus in the regional jet market.

BRAZIL AND CHINA

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

President Jair Bolsonaro said on Monday 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 supported and approved of the Boeing deal when others in the military remained suspicious that Boeing’s involvement could affect Brazilian interests.

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

On Monday, UBS suggested China may be interested in buying up Embraer commercial aircraft.

“We believe China aspires to a global aerospace leadership position and, in our view, Embraer would bring talent for design and development,” it said in a client note.