NEW YORK  - Boeing is paying the price for a competitive misstep. The aerospace giant appears set to gain control of Embraer’s regional-jet business after lifting its agreed offer to $4.2 billion. It’s not the greatest deal - rival Airbus got Canada’s Bombardier for a song after Boeing’s aggressive trade tactics backfired. But in this dogfight, it’s better to pay up than leave a flank exposed.

Airbus and Boeing used to shun the market for small, short-haul aircraft. But demand has boomed as airlines seek efficient regional airliners to feed their hubs, while Embraer and Bombardier have steadily encroached on the global duo’s territory. Their E2 and C Series jets carry up to 130 and 150 passengers, respectively, nearly the size of the smallest Airbus A320 and Boeing 737 models.

When Delta Air Lines placed a big order for the C Series in 2016, Boeing complained Bombardier was the beneficiary of Canadian subsidies and demanded hefty U.S. countervailing duties. American regulators ultimately rejected that argument, but not before a weakened Bombardier ceded control of the C Series to Europe’s Airbus – at no up-front cost and with $925 million of financing provided by the seller through 2020.

By contrast, Boeing has had to increase its offer for the Embraer business by a little over 10 percent – to a price slightly larger than the Brazilian parent company’s market capitalization. And Embraer’s regional-jets division isn’t yet running at full speed – only 15 planes were delivered in the third quarter. The group has recorded negative adjusted free cash flow of $550 million in the first nine months of the year.

If Embraer can regain the cruising altitude of 2017, when the commercial division had operating profit of around $440 million, Boeing’s share after tax would be roughly $276 million. That would be a return of just over 6.5 percent on its investment, below Embraer’s cost of capital of around 12 percent, according to Morningstar. The best that can be said is that Boeing, which expects more than $15 billion in free cash flow this year, can afford to be profligate.

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CONTEXT NEWS

- Boeing on Dec. 17 said it had reached agreement on the terms of a strategic partnership with Brazil’s Embraer. The U.S. aerospace company will pay $4.2 billion for an 80 percent stake in the Brazilian outfit’s commercial-airplane business.

- The two companies have also agreed to form a separate joint venture to develop new markets for Embraer’s KC-390, a military troop-transport and mid-air refueling plane. The Brazilian company will own a 51 percent stake in the venture and Boeing 49 percent.

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(Editing by John Foley and Martin Langfield) ((thomas.buerkle@thomsonreuters.com; Reuters Messaging: thomas.buerkle.thomsonreuters.com@reuters.net))