Joint venture
Boeing is forming a $4.75 billion venture with industrial partner Embraer and re-entering the market for smaller jetliners.
Boeing is forming a $4.75 billion venture with longtime industrial partner Embraer, a move that will bolster its arsenal in the newest battlefront with Airbus: the market for smaller jetliners.
Under a preliminary deal, Boeing will own 80 percent of a partnership controlling Embraer’s commercial airplane and services businesses while the Brazilian manufacturer holds 20 percent, the companies said in a statement Thursday. The tie-up bolsters the duopoly held by Boeing and Airbus 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 two 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 has drained billions of dollars from Bombardier Inc. Airbus is set to detail its plans for the Canadian jet family on July 10, days before a major aviation trade show in Farnborough, England.
“For Embraer, it means that we will have better access to markets with Boeing,” Embraer CEO Paulo Cesar de Souza e Silva said on a conference call. “Boeing also values a lot the way that Embraer designs, develops and engineers aircraft.”
Boeing will pay $3.8 billion for its stake in the venture — a valuation that prompted Embraer investors to look for the exits. The Brazilian company plunged 14 percent to 23.07 reais at 1:03 p.m. in Sao Paulo, after falling as much as 16 percent for the biggest intraday decline since the days following the Sept. 11 terrorist attacks. Embraer had surged 35 percent this year through Wednesday on anticipation of the deal.
“The valuation was lower than we expected, but we see a 20 percent upside to (Wednesday’s) closing price” of 26.95 reais, BTG Pactual analyst Renato Mimica said in a note.
Boeing advanced less than 1 percent to $334.09 in New York. Through the close of trading July 3, the shares had gained 13 percent this year, the fourth-best performance among the 30 members of the Dow Jones industrial average.
Joint venture deal’s details
The commercial venture will be run by a Brazil-based CEO and management team, while Boeing CEO Dennis Muilenburg will have ultimate control. Embraer, a jewel of Brazilian industry, plans to use the proceeds of the joint venture for highreturn investments and reducing debt, as well as a special dividend payment and a potential share buyback program.
The Sao Jose dos Campos, Brazil-based manufacturer will remain a separate company that makes military and private jets while reaping a revenue stream from the new partnership. The structure, along with the company’s flagging sales and an increasingly challenging market, helped win the support of the Brazilian government.
Boeing and Embraer said they plan to form a second joint venture to develop new markets for defense products and applications that bolster the Brazilian company’s military portfolio, including its KC-390 cargo aircraft.
The companies expect to finalize the agreement over the next several months and present it in November for formal approval by Brazil’s government, which has veto power, Souza e Silva said. It will go before shareholders by December, he said. Once the transaction is ratified by the government, there will be no need to involve the next president in the conversations, the CEO said. Brazil will hold presidential elections in October.
The deal is expected to close by the end of next year, a goal that Embraer Chief Financial Officer Nelson Salgado called conservative. The companies foresee the need to get antitrust approvals in at least 10 countries in which they jointly operate. Boeing said the partnership would add to its earnings beginning in 2020.