Boeing’s $4.75 Billion Embraer Deal Leaves Long To-Do List

(Bloomberg) -- After Boeing Co. and Embraer SA spent months hammering out the framework for a $4.75 billion planemaking partnership, the companies are ready to take the next step: yet more talks.

Crucial details about the financial underpinnings of the proposed venture announced Thursday still need to be figured out, a name needs to be chosen and a Brazil-based management team appointed. Officials are striving to finalize terms by late October or early November, and then they’ll seek the blessings of regulators in 10 countries.

That’s a long to-do list even after lengthy talks and a game of footsie between Boeing and Embraer that goes back years. The lack of details for the non-binding agreement puzzled some analysts and dashed expectations of a lofty payoff for Embraer investors.

“At the Quarter Final Stage,” Sheila Kahyaoglu, an analyst with Jefferies, headlined a report to clients Thursday.

“Notwithstanding the strategic underpinnings, the announcement appears premature, with a number of crucial details omitted by management,” wrote Robert Spingarn of Credit Suisse.

Embraer fell 3.8 percent to 22.23 reais at 11:40 a.m. in Sao Paulo, a day after plunging 14 percent for the biggest drop in almost two years. Boeing was little changed at $332.62 in New York.

Basic Framework

According to the basic outline agreed so far, Boeing would pay $3.8 billion to control 80 percent of the Brazilian planemaker’s commercial airplane and services businesses. Embraer would own the remaining 20 percent, while continuing to manufacture military and private jets. The two will form a separate military venture to support products such as Embraer’s KC-390 cargo transport.

The tie-up bolsters the duopoly held by Boeing and Airbus SE as competitive threats emerge from rivals in Russia, Japan and China. By adding Embraer’s E-Jet family to its portfolio, Boeing will expand its manufacturing base abroad while extending its reach into the market for 100-seat planes.

While the companies have discussed combining for more than a decade, the talks gained urgency in recent months as Airbus prepared to take control of the C Series -- the advanced jetliner that’s drained billions of dollars from Canada’s Bombardier Inc. Airbus is set to detail its plans for the jet family on July 10, days before a major aviation trade show in Farnborough, England.

Clear Benefits

The potential benefits of a partnership between the No. 1 and No. 3 planemakers are clear, even if implications for tax, working capital and debt aren’t known at this point. With Embraer’s smaller planes, Boeing’s portfolio would span the breadth of the commercial market, from 70 to 450 seats. Embraer would have its own deep-pocketed partner to help market its E-Jets and fend off threats from Airbus and others.

“We’re seeing consolidation in the supply chain and also in commercial aviation. We’re also seeing newcomers, like China,” said Paulo Cesar de Souza e Silva, Embraer’s chief executive officer, on a conference call. “So many actions happened in the market that led us to think that at this stage a partnership like this one makes a lot of sense.”

Market Power

Boeing and Embraer can work together to “muscle down on their suppliers,” said Richard Aboulafia, an aerospace analyst with Teal Group. They may be able to broaden sales for the 100-seat jets, a minor market niche, by ratcheting down costs, he said. Boeing also stands to win sales for its services division while tapping Embraer’s engineering skills and manufacturing capacity.

“It’s a competitive response to Airbus, the C Series and Comac,” said Ken Herbert, analyst with Canaccord Genuity, referring to Commercial Aircraft Corp. of China. “I see a number of reasons to do it, none of them game-changing.” From the standpoint of a Boeing investor, $3.8 billion is just three months of free cash flow, Herbert pointed out. “It’s not going to break the bank.”

Spingarn sees Embraer’s engineering force helping design the mid-range jet family contemplated by Boeing, with a possible entry into commercial service by mid-decade. Then there’s the potential for what he dubs the“E3,” the follow-up to Embraer’s E2 family that could serve as a bridge to an all-new Boeing narrow-body family.

But that’s another item for the to-do list. The companies would have to work out how to compensate their new venture for such research and development.

©2018 Bloomberg L.P.

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