In depth | Embraer, Boeing take next step to joint venture
Embraer has finalized the terms of its planned joint venture with Boeing, under which the U.S. manufacturer would take control of Embraer’s commercial aircraft business. However, the proposed deal still needs the go-ahead from the Brazilian government, which has proven itself to be difficult on the matter, stalling the tie-up for several months.
Embraer and Boeing announced on December 17, 2018, they have approved the terms of their proposed joint venture (JV). The deal would see Embraer enter a “strategic partnership” with Boeing by selling an 80% stake in its commercial aviation activities, including aftermarket support services, to the U.S. aerospace giant.
The business partnership is to be led by Brazil-based management, including a chief executive and president, an official statement from the manufacturers indicates. Boeing will have operational and management control of the new company, while “Embraer will retain consent rights for certain strategic decisions, such as transfer of operations from Brazil,” the statement reads.
What is different now?
The terms of the deal may have been finalized, but the closing of the deal still has a way to go. Essentially, the terms have not changed from when the joint venture was first announced in July 2018, and the official statement itself is of a “forward-looking” nature.
Primarily due to the fact that for Embraer and Boeing to finalize the transaction they need the approval from Brazil’s government, which has veto power at the plane maker. Only then would it be subjected for a final say from the shareholders and the regulatory authorities.
The Boeing deal already has the approval of U.S. President Donald Trump. But Brazilian lawmakers have been reluctant to give their blessing for the merger. Earlier this month, a Brazilian federal court blocked the partnership, forbidding Embraer’s board of directors from signing the deal, according to Reuters.
The legal action was brought about by a group of congressmen belonging to the left-wing Workers Party. Unhappy with the power Boeing would have over the country’s manufacturer, including the loss of national jobs - one of the many points of criticism, the Brazilian Congress demanded to be consulted with on the matter from the start, as A21.mx reported.
In his decision to block the transaction, Judge Victorio Giuizio Neto seemed to express disbelief that giving up a profitable commercial division would be good for Embraer. “The reason is very simple, Boeing is not giving up anything [in this deal]”, the judge was quoted as saying by Reuters.
He added that the new company would restrict the Brazilian government’s control over Embraer’s remaining activities, the ones that will not be sold to Boeing.
The more substantial fears surround Embraer’s military division and the strategic assets that the Brazilian government would rather have safeguarded. A second, separate joint venture for defense programs was also announced by the airframers: the two parties will produce and market only one product for the military market, Embraer’s multi-mission airlifter KC-390, currently under development.
In their recent statement Boeing and the Brazilian manufacturer confirmed they have also shook on the terms of this joint venture, under which, Embraer would retain a 51% stake, while Boeing would own the remaining 49%.
But the transaction also needs the blessing of Brazilian government, as well as ratification by Embraer’s board of directors. And it had already received the same pushback, when Judge Giuizio Neto called on Brazil’s National Defense Council - an advisory body made up of ministers and commanders of the Armed Forces - to express itself on the tie-up before it may be finalized.
So is the merger a good idea for Embraer?
Nevertheless, the two plane makers are putting on a happy face (for now at least): a Brazilian federal court overturned the injunction blocking the deal just a few days later after it was filed, and now, a week later, the terms have been agreed on. Brazil's newly-elected president, Jair Bolsanaro, who should take office on January 1, 2019, is also in favor of the project. Embraer and Boeing thus conclude that they expect to finalize the transaction by the end of 2019.
The official story is that the Brazilian and U.S. manufacturers seek to compete in the market of 100-passenger aircraft against the rivaling Airbus-Bombardier alliance. It is said that Embraer would benefit from Boeing’s commercial power and that the deal would also protect the airframer against the rivaling alliance.
"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," said Paulo Cesar de Souza e Silva, Embraer’s president and CEO stated in the official document.
But look at what happened with Airbus and Bombardier: the acquisition of the CSeries program by Airbus, which was then rebranded as the A220 family, saw Bombardier sell its QSeries aircraft portfolio just a few months later as well, leaving it almost primarily a rail and train manufacturing business.
If Boeing is to absorb Embraer’s commercial plane production by using those plane models to enrich its catalogue with smaller aircraft, like the new E-Jets series, are we expect a similar situation coming from Embraer too in the coming months?
So let us follow the money: the majority stake that Boeing is to acquire in the joint venture is worth $4.2 billion; this is up from the initial $3.8 billion valuation the U.S. manufacturer had projected.
According to the official statement, the partnership is expected to be neutral to Boeing’s earnings per share in 2020 and accretive thereafter. The deal is expected to generate annual pre-tax cost savings of approximately $150 million from 2022.
The Brazilian plane maker has reportedly said that the transaction costs have increased. Market valuations indicate the total amount that Embraer will receive is around $3 billion. The company will receive the same net proceeds from the deal, even though Boeing increased the enterprise value, Reuters wrote on December 17, 2018.
Valuation figures were disclosed in the final terms of the transaction, which would leave Embraer as a smaller company focused on defense and business jets, with a minority stake in the basically Boeing-led business.
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