Embraer breakup complications are delaying its deal with Boeing: sources

SAO PAULO (Reuters) - The tricky work of divvying up the three business segments of Brazilian planemaker Embraer SA EMBR3.SA has been delaying an agreement to combine operations with Boeing Co BA.N, three people with knowledge of the matter said this week.

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The two planemakers announced last month that they were in talks to set up a new company focused on commercial aviation, excluding Embraer’s defense division and possibly its business jet unit.

The companies have won the support of Brazil’s government for such a deal, but the maneuver has created other headaches, according to the sources, who spoke to Reuters anonymously due to the sensitivity of talks.

Negotiators are picking through the details of long-term service contracts between the companies and working on how to distribute Embraer’s thousands of engineers, many of whom have migrated between military and civilian projects during their careers.

Asked for comment, Boeing referred to remarks by Chief Executive Dennis Muilenburg on Wednesday, when he said talks were making progress, but the Embraer deal was not a “must do.”

Embraer representatives did not respond to a request for comment.

Embraer shares in Sao Paulo erased gains after the Reuters report, closing 2.6 percent lower on Thursday.

The decision to leave Embraer’s defense operations separated has helped to overcome concerns about sovereign control of Embraer’s military programs by the Brazilian government, which holds a strategic veto over the deal, but it has not produced a final agreement as quickly as some expected.

“I’m quite optimistic,” said Defense Minister Joaquim Silva e Luna, who is responsible for the task force overseeing the deal, when asked about the negotiation. “It is in advanced stages and should be resolved this year.”

Boeing’s original proposal, a straightforward acquisition, could have been wrapped up by now, but it has proven more challenging to design an offer that leaves Embraer standing as a financially robust company focused on defense, the sources said.

Embraer's 70- to 130-seat E-Jets, which compete with the C-Series program designed by Bombardier Inc BBDb.TO and run by Airbus SE AIR.PA, account for about 60 percent of the Brazilian firm's revenue and nearly all of its operating profit.

The company’s defense division has barely turned a profit in recent years, since Brazil’s government slashed military spending in an effort to close a gaping budget deficit.

Embraer has also been losing money on a fresh line-up of business jets, as the executive aviation market stagnates.

The companies have still not reached a final decision on whether to include the unit with the commercial jet division in the new company, in which Boeing would own a roughly 80 percent stake, according to two of the sources.

Reporting by Tatiana Bautzer and Brad Haynes; Additional reporting by Tim Hepher in Paris, Editing by Rosalba O’Brien