Boeing proposes Embraer tie-up excluding defense unit: source

BRASILIA (Reuters) - Boeing Co BA.N has sought the Brazilian government's approval of a partnership with planemaker Embraer SA EMBR3.SA that would create a new company focused on commercial aviation, a person familiar with the matter said on Friday.

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The new vehicle would not include Embraer’s defense unit under the proposal presented on Thursday, according to the source, who asked not to be named due to the sensitivity of ongoing talks.

Embraer said in a securities filing that it was in ongoing talks with Boeing and the Brazilian government about a potential partnership that could eventually create a new company, but it had not received a formal proposal from Boeing.

A Boeing representative in Brazil said the structure of a possible deal with Embraer was “still being studied.”

Government sources told Reuters it was too early to say if the latest suggested structure of a deal would pass muster with all ministries concerned and, importantly, with the military. Some did say that the latest structure would seem to meet the main government demands, especially regarding the protection of Brazilian defense programs.

Representatives at Brazil’s Defense Ministry, which set up a committee to make recommendations to the government on a partnership, declined to comment immediately.

Brazil’s Air Force repeated on Friday that they “consider Embraer to be fundamental for the country’s security and any decision has to take into account national sovereignty.”

Embraer shares, which surged as much as 9 percent after a report by Globo media suggested that Embraer had accepted a proposal from Boeing, pared gains to around 4.5 percent in afternoon trading. Boeing shares were down about 1.5 percent.

Boeing's proposed tie-up with Embraer, the world's third-largest planemaker, would give it a leading share of the 70- to 130-seat market and create stiffer competition for the CSeries program designed by Canada's Bombardier Inc BBDb.TO and backed by European rival Airbus SE AIR.PA last year.

An unexpected U.S. trade ruling last month scrapping tariffs on CSeries jets added to pressure on Boeing and Embraer to pull off a tie-up of their own.

Brazil’s government has openly pushed for a partnership between the two companies focused more narrowly on commercial aviation, rather than an outright acquisition, due to concerns about the independence of Brazilian defense programs.

The government, which holds about 10 percent of Embraer shares through public-sector funds, still has veto power over its military programs and any takeover attempts due to a golden share in the former state enterprise.

Boeing has sought ways to preserve the government’s golden share in Embraer and previously proposed safeguards for defense programs in Brazil along the lines of its subsidiaries in Britain and Australia, sources have told Reuters.

Reporting by Ricardo Brito; Writing and additional reporting by Brad Brooks and Brad Haynes; editing by Daniel Flynn, Phil Berlowitz and Susan Thomas