Boeing will take an 80-percent share of Embraer’s commercial aviation business under the terms of a non-binding agreement announced Thursday. 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.