Embraer Sinks to Lowest Since ‘09 on $4.2 Billion Boeing Breakup

(Bloomberg) -- Embraer SA tumbled to the lowest since 2009 after Boeing Co. scrapped a proposed $4.2 billion commercial-jet deal amid a severe slump in aircraft sales.

The Brazilian planemaker has already begun arbitration proceedings, according to a regulatory filing Monday, two days after vowing to seek damages from Boeing. The U.S. aerospace giant pulled the plug April 25, citing unspecified issues. Last week, Embraer’s total market value fell to about a quarter of what Boeing had been poised to pay for the commercial-plane business alone.

The deal’s collapse leaves Embraer on its own to face plunging aircraft sales as the coronavirus pandemic all but erases travel demand. With airlines forecasting a slow recovery from their worst-ever crisis, Embraer must also try to jumpstart orders for its upgraded E2 aircraft against a new offering from Airbus SE.

“The termination is a negative for ERJ,” Cai von Rumohr, an analyst at Cowen & Co., said in a note to clients, using the ticker symbol for Embraer’s American depositary receipts. “In addition to Covid-19 impact on ERJ’s commercial aircraft deliveries, the company must reintegrate its commercial operations with its defense and bizjet business.”

Embraer plummeted 12% to 7.31 reais at 2:16 p.m. in Sao Paulo after sliding to as little as 6.91 reais for the lowest intraday price since March 2009. The shares had plunged 59% this year through April 24, comparable to the declines of Boeing and Airbus. Boeing fell less than 1% to $128.24.

“Our industry will have to address the challenges of Covid-19 and current economic conditions,” Embraer Chief Executive Officer Francisco Gomes Neto said Monday on a conference call with analysts and investors. “We are now considering what would be the best strategy for our commercial aviation.”

For Latin America’s largest economy, the episode is another headache. Brazilian companies have fired employees and scrapped expansion plans to cope with the Covid-19 crisis, and the national death toll stands at more than 4,000. Embraer has reduced salaries and hours in several plants, including at its main hub in Sao Jose dos Campos.

Chinese Interest

Embraer said it’s still working on new financial projections while assessing impact of the deal’s cancellation on cash. The company suspended its forecasts in late March as the coronavirus spread.

With a history stretching back 50 years, Embraer’s experience and engineering prowess may attract new suitors. Brazilian President Jair Bolsonaro said the government could seek other partnerships for the company, while adding that the talks with Boeing may resume, according to Estado newspaper.

China Commercial Aircraft could have interest and even propose the same terms negotiated with Boeing to reduce the execution risks, said Bradesco BBI’s Victor Mizusaki. UBS Group AG echoed the potential for such a deal.

“China still aspires to a global aerospace leadership position,” UBS analysts led by Myles Walton said in a report. Embraer “would bring both the talent for design and development but, as importantly, the expertise and capability on a global service and support network.”

But it’s still too soon to count Embraer out as an independent company. Liquidity doesn’t seem to be a concern in the short term: Embraer had a cash position of $2.8 billion and $215 million in short-term loans at the end of last year. A new $600 million term loan in March pushed liquidity over $3 billion, according to Bloomberg Intelligence.

Taking back control of its new E2 generation of planes may provide a boost in the long term.

“Embraer felt a little bit listless without the e-jet franchise,” Bloomberg Intelligence analyst George Ferguson said. “And they’re getting it back. It’s going to be a rough year for everybody, but this is a cash generator at Embraer, so it might actually be positive.”

‘New Reality’

That doesn’t mean slogging through 2020 will be easy. Consulting firm Roland Berger says demand for new aircraft could drop by almost half if the pandemic forces airlines to keep much of their fleets grounded for six months.

Boeing abandoned the tie-up weeks after CEO Dave Calhoun warned employees that the company would need to adjust to a “new reality” as travel demand all but vanishes.

The termination of the Embraer deal follows a massive shift in both the commercial landscape and Boeing’s balance sheet. When talks began in late 2017, the U.S. manufacturer was flush with cash and eager to tap Embraer’s engineers to help design a new, midrange jet family that was on Boeing’s drawing board.

Now, Boeing has scrapped its product-development plans as its reputation and finances have been battered by two deadly crashes of the 737 Max, the company’s best-selling jet.

As for Embraer, the company is one of the few surviving startup planemakers of the past half century, with a history of weathering crises, said Ron Epstein, an analyst at Bank of America Corp.

“It will be a challenge, as this environment will be a challenge for everybody,” he said, adding that Bank of America expects that global air traffic won’t return to last year’s levels until 2023. “But I would expect them to survive and move on.”

©2020 Bloomberg L.P.