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Morningstar | Embraer Prepares for Life After the E-Jet; Boeing Deal Will Likely Close End of 2019

Embraer is selling off 80% of its commercial aviation business to Boeing. Within this business, Embraer boasts the number-one position in the market for commercial aircraft between 70 and 130 seats. However, the Airbus majority stake in the Bombardier C Series program presents a challenge to Embraer's regional jets and this was a major impetus behind the Embraer and Boeing tie-up. Embraer has also focused on developing its defense and security business with support from the Brazilian government. The KC-390 transport aircraft is the company's flagship defense program and although the company has faced some challenges, we think the aircraft will ultimately be a success thanks to the sales and marketing joint venture that Embraer plans to establish with Boeing. In its business jet unit, Embraer has registered impressive growth thanks in part to the Phenom 300 aircraft and now has a dominant position in the lower-end segment. The introduction of midsize business jets is broadening Embraer's offerings, but it faces competition from Textron's Cessna and lackluster growth in the lower end of the market. The Boeing deal will see most of the debt leave Embraer's balance sheet and result in $3 billion or more of net proceeds for the Brazilian company and Embraer plans to make a special dividend of around $1.6 billion after deal close (probably in early 2020), which is about 40% of the company's current market capitalization. However, we think the remaining executive jet and defense businesses will struggle to post EBIT margins above 5% and cashflow is likely to be only slightly positive in the first year or two of the new company.