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Brazilian Government Is Boeing-Embraer's Illustrious Absentee

07/06/2018 - 11h12



After 11 long paragraphs of the announcement which outlines the purchase of Embraer's regional jets by American Boeing, the term "Brazilian government" finally appears as one of the shareholders which have to approve the deal.

This swiftness contrasts with Brazilian president Michel Temer's reaction when he learned, through the media, that both companies were in 'advanced negotiations' about a possible tie-up. Back then, at that end of December 2017, Temer clearly stated Embraer would never be sold.

In fact, the government had already sold the company in 1994, but what the president intended to say was that he would veto the loss of national controlling interest by making use of a special class of share, the "golden share". This was also a half-truth, since Embraer's capital is highly decentralized and foreign funds compose the majority of its portfolio. However, the political message had been delivered.

P Photo/Ted S. Warren, File
After months of negotiations, the Brazilian government approved the continuation of the deal between Boeing, of the U.S., and Brazil's Embraer
After months of negotiations, the Brazilian government approved the continuation of the deal between Boeing, of the U.S., and Brazil's Embraer

The Americans did not like it, but they understood the situation. They met with Brazilians several times at the negotiating table over the course of six months, and a work group had been formed by the Administration, including representatives of the Defense, Treasury, BNDES and the Air Force. At that point, they started smoothing out the rough edges, until they reached the agreement which was partially disclosed on Thursday (5).

The first and most important obstacle had been placed by the military. They did not accept the purchase of Embraer as a whole by Boeing, as initially intended, considering this would cause them to lose control over strategic decisions related to important projects - a new aircraft ordered from Embraer, for example, could be subject to the approval of the American Congress. Boeing said it would provide guarantees, but it eventually gave in.

Meanwhile, the political tone of the discussion gave way to technical arguments. In an election year, whose contamination has already affected the proposal for the privatization of Eletrobras, the government was afraid of being held accountable for failed negotiations regarding an agreement which would be good for the Brazilian company.

Presidential candidates such as Ciro Gomes (PDT) have already stated they would veto the deal. This makes the deadline of up to 18 months to conclude negotiations after the approval of the deal seem quite vulnerable under the Brazilian institutional framework.

The Administration's order now is to wait for three or four months of fine tuning and technical evaluation of the deal, and then make an announcement when the matter is submitted to Embraer's Board of Directors. The Brazilian Government has one member on the Board (formed by 10 members), entitled to "Golden Share" veto powers. They will have 30 days to make a decision after the proposal is formally received.

If the deal is approved, it would be very unlikely for a new government to be able to reverse such decision. But the political turmoil caused by a president who opposes the new company seems to have already been reflected in Embraer's shares, which plummeted after the agreement was announced.


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