Boeing and Embraer Agree to $4.75 Billion Commercial JV

Boeing will take an 80-percent share of Embraer’s commercial aviation business under the terms of a non-binding agreement announced on July 5. The memorandum of understanding proposes the formation of a joint venture meant to “strategically align” the companies’ commercial development, production, marketing, and lifecycle services operations. Under the terms of the agreement, Boeing will hold an 80 percent ownership stake in the joint venture and Embraer will own the remaining 20 percent stake.

The transaction values Embraer’s commercial aircraft operations at $4.75 billion and contemplates a value of $3.8 billion for Boeing’s 80 percent ownership stake in the joint venture. Boeing said it expects the partnership will become accretive to its earnings per share in 2020 and to generate annual pre-tax cost “synergies” of some $150 million by its third year. 

The companies expect completion of the financial and operational details of the partnership and negotiation of transaction agreements to continue “in the coming months.” The transaction would then remain subject to shareholder and regulatory approvals, including approval from the government of Brazil. Assuming the approvals come in what the joint statement characterized as a timely manner, the companies expect the transaction to close by the end of 2019, or 12 to 18 months after execution of the definitive agreements.

“By forging this strategic partnership, we will be ideally positioned to generate significant value for both companies’ customers, employees, and shareholders—and for Brazil and the United States,” said Boeing CEO Dennis Muilenburg. “This important partnership clearly aligns with Boeing’s long-term strategy of investing in organic growth and returning value to shareholders, complemented by strategic arrangements that enhance and accelerate our growth plans.” 

A joint statement announcing the deal indicated that Boeing will take full operational and management control of the new company, but that a Brazil-based management team, including a president and CEO, will lead the joint venture and report to Muilenburg. It also noted that the joint venture will become one of Boeing’s centers of excellence for “end-to-end” design, manufacturing, and support of commercial passenger aircraft, and will fully integrate into Boeing’s broader production and supply chain.

Notwithstanding reported resistance by the Brazilian government to allowing Embraer to cede control of its defense business, the companies also announced they will create a separate joint venture to develop new markets for defense products and services, in particular, Embraer’s KC-390 multi-mission aircraft. The statement did not indicate whether or not Embraer would hand over any stake of the KC-390 program to Boeing, however. 

“Joint investments in the global marketing of the KC-390, as well as a series of specific agreements in the fields of engineering, research and development, and the supply chain, will enhance mutual benefits and further enhance the competitiveness of Boeing and Embraer,” said Embraer executive vice president of financial and investor relations Nelson Salgado.

The transaction will not affect Boeing and Embraer financial guidance for 2018 or Boeing’s cash deployment strategy and commitment to returning “approximately” 100 percent of free cash flow to shareholders.

Top executives from Boeing and Embraer marked their proposed joint venture last month at the Farnborough Airshow with a joint briefing to promote the move and, perhaps more important, send a signal to the aerospace industry of their commitment to complete the deal next year.

Calling the deal to take an 80-percent share in Embraer’s commercial aircraft business and establish a joint venture to support the KC-390 tanker transport a “natural evolution” of the two companies’ 30-year relationship, Muilenburg also expressed satisfaction with the opportunity to further align their cultures, engineering expertise, and technical capabilities.

For his part, Embraer CEO Paulo Cesar de Souza e Silva emphasized the strategic value of the deal for his company and the social value of the growth it will engender for the Brazilian people.

“We believe that this transaction is very strategic, so it’s a partnership that will provide Embraer access to new markets,” said Silva. “Of course, Boeing is a bigger global player. We would have the opportunity to complement Boeing’s products and have much more access to clients around the world. More access to markets means more aircraft that will be manufactured, delivering more jobs in Brazil, more technology going forward, [and] access to more capital.”

Silva explained that Embraer represents “a good fit” for Boeing not only for competitive reasons, but in the Brazilian company’s expertise in areas such as landing gear, pylons, and aircraft interiors.

Muilenburg noted that the two companies have participated in detailed discussions over the last year, working through “in a very disciplined way” the deal’s structure, the associated regulatory approvals, and the shareholder votes that would occur subsequent to reaching a final proposal. “So we’ve laid out the framework for completing due diligence and all of the final approvals over the next year or so, and we’ve made a lot of strong progress on that to date, which has allowed us to make this partnership announcement.”

He also addressed potential concerns over the competitive implications of the trend toward consolidation in the aerospace industry, insisting that the arrangement would create more choices for customers, not fewer.

“When you take a look at the global aerospace market, clearly there have been very few strong players throughout the world. That’s been the nature of the marketplace,” Muilenburg said. “We have seen some consolidation forces in the marketplace in the supply base as well. We think this move is one that brings together two great companies that don’t overlap today. There’s no overlap in our product lines; rather they’re complementary fits.”

Silva concurred. “There’s nothing wrong with a duopoly as long as our customers benefit,” he said.