(Adds market reaction, details of talks, competitive context, comments from source and executives)
By Rodrigo Viga Gaier and Brad Haynes
RIO DE JANEIRO/SAO PAULO, April 12 (Reuters) - A new proposal for a tie-up between planemakers Boeing Co and Embraer SA that was submitted to Brazil’s government on Tuesday brings the deal closer, but there are still issues to be ironed out, four people with knowledge of the matter told Reuters.
The two companies said in December that they were discussing “a potential combination,” but the Brazilian government, which holds veto power over strategic moves at Embraer, needs to give its blessing.
The new proposal is expected to go before President Michel Temer in the coming weeks, according to two of the sources, who spoke on the condition of anonymity about the confidential talks.
“It’s not an easy operation. It’s quite complex, but it’s moving along. It’s just not going to come out imminently,” said one of the sources.
Embraer shares, which had climbed 10 percent in two days on anticipation of the deal, fell as much as 2 percent in Sao Paulo on Thursday after the report.
Embraer and Brazil’s Defense Ministry, which has been heading up the government’s working group on the deal, did not immediately respond to requests for comment.
At an event in Scotland, the head of Embraer’s commercial aviation unit, John Slattery, declined to comment.
Boeing referred to comments by chief executive Dennis Muilenburg in February, saying the timing was right for the companies to combine forces and a tie-up would be “a great strategic fit, but it’s not a must do.”
While the broad outlines of a deal seem to have satisfied all parties’ main concerns, there are finer points to settle between the companies, whose partnership in the 70- to 130-seat regional jet segment would mean stiffer competition for Bombardier Inc and Airbus SE’s CSeries program.
For example, negotiators still need to define Boeing’s final stake in a new joint venture containing Embraer’s commercial aviation business, which is likely to be just over 80 percent in return for a cash payment, according to two of the sources. It was still unclear if Embraer would have a seat on the board of the new company, they added.
But they said key government concerns are addressed in the plan, which ensures that Embraer, which would keep its defense and business jet divisions, retains the engineering capacity necessary to design and build new aircraft. Long-term service agreements between Embraer and the new company should also guarantee their long-term viability, sources said.
Reporting by Rodrigo Viga Gaier in Rio de Janeiro and Brad Haynes in Sao Paulo Additional reporting by Tim Hepher in Aberdeen and Alberto Alerigi Jr in Sao Paulo Editing by Phil Berlowitz and Rosalba O'Brien