Aerospace & Defense

Boeing Pays $4.2 Billion for Stake in Embraer JV

Boeing Co. (NYSE: BA) and Brazil’s Embraer S.A. (NYSE: ERJ) announced Monday morning that the two companies have approved the terms of a strategic partnership comprised of the commercial aircraft and services operations of Embraer. Boeing will pay $4.2 billion for an 80% stake in the joint venture and Embraer will own the remaining 20%.

The announcement does not mention the ruling earlier this month in which a Brazilian court granted an injunction to four Brazilian legislators associated with the country’s leftist Workers Party forbidding the Embraer’s board of directors from completing a deal to create a joint venture. The ruling was reversed just days later by a higher court, likely giving the green light to this morning’s announcement.

The agreement also notes that the deal is still awaiting approval from the Brazilian government, which owns a stake in the company and a much more important right to approve or reject any major deal involving Embraer, which also produces military aircraft for Brazil and foreign buyers. Boeing would have no stake in the military business.

The current government has deferred the decision to the new government that is scheduled to be sworn in on January 1. Newly elected president Jair Bolsonaro already has said he supports the transaction. Assuming approvals and an end to legal hurdles, the transaction is expected to close by the end of 2019.

The transaction is expected to be revenue neutral to Boeing’s earnings per share in 2020, turning positive thereafter. By the third year of operation, the JV is expected to provide pretax savings of around $150 million.

Boeing CEO Dennis Muilenburg said:

Boeing and Embraer know each other well through more than two decades of collaboration, and the respect we have for each other and the value we see in this partnership has only increased since we announced our joint efforts earlier this year.

Paulo Cesar de Souza e Silva, Embraer’s CEO, added:

We are confident that this partnership will deliver great value to Brazil and the Brazilian aerospace industry as a whole. This alliance will strengthen both companies in the global market and is aligned with our long-term sustainable growth strategy.

There are essentially two reasons that Boeing did this deal. First, Embraer builds mainly regional jets but delivered its first E190-E2 jet with seating for 97 to 114 passengers in April. A larger E195-E2 that carries 120 to 146 passengers began flight testing last year and is scheduled for first delivery next year. These new planes meet the challenge posed by Airbus A220, which the European aircraft maker acquired from Canada’s Bombardier and has begun shipping to customers.

Boeing also gains access to Embraer’s young engineering workforce and the technology it has developed to build two different aircraft on the same assembly line. The E1 and E2 both have a mostly common fuselage, but a variety of engines, wings and landing gear. Having the ability to build both planes on the same line is a major advantage.

Boeing’s stock traded down about 0.3% in Monday’s premarket, at $317.85 in a 52-week range of $293.01 to $394.28. The stock’s 12-month price target is $417.24.

Embraer shares traded up 4.4% at $22.05, in a 52-week range of $17.99 to $28.55. The 12-month price target on the stock is $25.80.