Boeing sealed a deal for a controlling stake in the commercial aircraft arm of Brazilian plane maker Embraer under a new $4.75bn joint venture, reshaping a global passenger jet duopoly.
Boeing and Embraer announced they have signed a Memorandum of Understanding to establish a strategic partnership that positions both companies to accelerate growth in global aerospace markets.
The non-binding agreement proposes the formation of a joint venture comprising the commercial aircraft and services business of Embraer that would strategically align with Boeing’s commercial development, production, marketing and lifecycle services operations.
Under the terms of the agreement, Boeing will hold an 80% ownership stake in the joint venture and Embraer will own the remaining 20% stake.
“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 Dennis Muilenburg, Boeing’s chairman, president and chief executive officer.
The transaction values 100% of Embraer’s commercial aircraft operations at $4.75bn and contemplates a value of $3.8bn for Boeing’s 80% ownership stake in the joint venture.
The proposed partnership is expected to be accretive to Boeing’s earnings per share beginning in 2020 and to generate estimated annual pre-tax cost synergies of approximately $150m by year three.
The strategic partnership will bring together more than 150 years of combined leadership in aerospace and leverage the two companies’ highly complementary commercial product lines. The partnership is a natural evolution of a long-standing history of collaboration between Boeing and Embraer over more than 20 years.
On finalization, the commercial aviation joint venture will be led by Brazil-based management, including a president and chief executive officer. Boeing will have operational and management control of the new company, which will report directly to Muilenburg.
The joint venture will become one of Boeing’s centres of excellence for end-to-end design, manufacturing, and support of commercial passenger aircraft, and will be fully integrated into Boeing’s broader production and supply chain.
Boeing and the joint venture would be positioned to offer a comprehensive, highly complementary commercial airplane portfolio that ranges from 70 seats to more than 450 seats and freighters, offering best-in-class products and services to better serve the global customer base.
In addition, both companies will create another joint venture to promote and develop new markets and applications for defence products and services, especially the KC-390 multi-mission aircraft, based on jointly-identified opportunities.
“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 Nelson Salgado, Embraer’s Executive Vice President, Financial and Investor Relations.
Finalization of the financial and operational details of the strategic partnership and negotiation of definitive transaction agreements are expected to continue in the coming months.
Upon execution of these agreements, the transaction would then be subject to shareholder and regulatory approvals, including approval from the Government of Brazil, as well as other customary closing conditions.
Assuming the approvals are received in a timely manner, the transaction is expected to close by the end of 2019, 12-18 months after execution of the definitive agreements.
Boeing and Embraer will benefit from a broader scale, resources and footprint, including global supply chain, sales and marketing, and services network, which will enable them to capture benefits from best-in-class efficiencies across the organizations. Additionally, the strategic partnership will provide opportunities to share best practices in manufacturing and across development programs.
The transaction will have no impact on Boeing and Embraer financial guidance for 2018 or Boeing’s cash deployment strategy and commitment to returning approximately 100% of free cash flow to shareholders.