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Morningstar | Boeing and Embraer Dance the Samba to the Tune of $4.2 Billion

Boeing and Embraer finalized the terms of their joint venture in which Boeing will acquire Embraer’s regional jet business for $4.2 billion (up from $3.8 billion) in an all-cash deal. We already baked the new JV into our Embraer model, and because the Boeing price increase is linked primarily to tax and other costs, we’re not updating our $23 fair value estimate for Embraer. We’re in the process of incorporating the JV into our Boeing model and don’t anticipate a significant fair value estimate change because the anticipated cash-out is only 2% of market capitalization.

The JV continues to target $150 million of pretax synergies thanks to Boeing applying its buying power to Embraer’s supply chain. Embraer believes another $50 million of cost savings can be achieved in executive jets–-which will remain 100% owned by the Brazilian firm–-thanks to support agreements between this business and the regional jet JV. All Embraer bonds currently outstanding (about $3.5 billion) will transfer into the JV. Consistent with the initial announcement, Embraer will hold a 10-year put option on its 20% stake set at the purchase price plus annual escalation for inflation. After 10 years, the put option will be tied to the market value. However, we don’t think management plans to exercise this put anytime soon. We believe the tie-up is attractive for Boeing because it gives the company access to Embraer’s engineers for the development of its next-generation midsize aircraft and provides additional manufacturing options outside Washington state.

Separate from the regional jet JV, Boeing and Embraer announced their respective shares in the KC-390 JV for the first time: 51% (Embraer) and 49% (Boeing). This JV is contract-specific with certain contracts remaining outside the JV. It’s our understanding that the Brazilian KC-390 order will sit outside the new JV. Both the regional jet and the KC-390 JVs are included in the Brazilian government’s review.

The path to deal closure looks much clearer now after approval by the Embraer board and the recent ruling against a Brazilian court’s injunction that tried to block Boeing’s purchase. It’s possible that government approvals and the ratification of the government’s consent by Embraer could be completed by mid-February next year. No further approvals are required from Boeing’s side now, and Embraer should move soon to submit the deal to the Brazilian government, which has veto power by dint of its golden share. Although incoming President Jair Bolsonaro seems to have a favorable view of the deal, he won’t take office until Jan. 1, and the current administration will probably punt any decision to him. Thus, we anticipate government approval, but we could envision it asking for an extension to its mandated 30-day review period. Following government approval, the Embraer board must ratify the deal, but we view this step as a formality. Antitrust review would then be the last hurdle to overcome, and we don’t see any major blocking points, particularly given Airbus' successful takeover of Bombardier’s C Series regional jet.