Brazil to maintain control over Embraer

Brazil on Friday ruled out relinquishing government control over the country's strategically important aircraft manufacturer Embraer but said investment from Boeing would be welcome.

"We welcome an injection of foreign capital. What we are not considering is the question of transferring" control, President Michel Temer said in Brasilia. The government holds a so-called golden share in the privatized Embraer, the world's third biggest airplane builder.

When Embraer and the US aerospace giant announced Thursday that merger talks were underway there was an immediate sharp rise in the Brazilian company's share price.

A merger between the two companies would build on their existing alliance on the KC-39 military plane and would permit the much-bigger Boeing to fill a gap in its fleet with Embraer's regional single-aisle planes.

Crucially, a transaction also would respond to an alliance between Boeing archrival Airbus and Canada's Bombardier to build smaller planes.

However the political sensitivity over Embraer's ownership and immediate opposition from the local trade union means that Boeing is more likely to seek something less than a full takeover, such as a joint venture.

Brazilian Defense Minister Raul Jungmann emphasized the strategic importance of the company. Embraer is also one of the chief sources of economic pride in a country just coming out of a severe recession and whose flagship oil company Petrobras has been badly damaged by graft scandals.

"Our position is positive about this and other commercial partnerships," Jungmann said. However, with its "major defense component," Embraer cannot be fully sold off.

- Competitors circling -

Canaccord Genuity, a US financial services firm, said in an analysis note that while Boeing is looking to defend itself against the Airbus-Bombardier tie-up, a deal with Embraer might not work out.

"We are not surprised the two companies have held talks, but we view an eventual agreement as unlikely, and we do not see the benefit for Boeing aside from as a defensive move," the note said.

However, Embraer might also have its own reasons for seeking an ally.

"It's looking for a financial shield against new competitors" in the intense market for smaller planes of 120 to 150 passengers, said Nelson During from DefesaNet website, which covers the sector. They now include manufacturers from China, Japan, Russia and elsewhere.

During also pointed out that from a strategic point of view, Embraer is already closely linked to the United States, with both military and executive aircraft being produced there.

Commercial airliners, however, are produced entirely in the company's site in Sao Jose dos Campos, in Sao Paulo.

The issue is as much political as business-related, especially with a presidential election coming up next year where leftist former president Luiz Inacio Lula da Silva is seeking to return. Part of his message is harsh criticism of Temer's market-friendly reforms, including a push to attract more foreign capital into key areas such as oil.