Possible Boeing-Embraer Tie-Up No Surprise
Reports say the deal is in a holding pattern as the two parties await the Brazilian government's approval.
Following the Airbus-Bombardier C Series tie-up, we flagged the possibility of wide-moat Boeing moving closer to Brazilian regional jet manufacturer, Embraer (ERJ). Reports came out on Dec. 21 that Boeing (BA) was in talks to buy Embraer and that the deal was in a holding pattern as the two parties await the Brazilian government’s approval.
Embraer shares rose more than 20% on the back of the news (trading was halted for a brief time) and the ADRs are nearing our fair value estimate of $26 per share. The reports are unconfirmed, the Brazilian government might block a deal, and it’s not clear if the talks are ongoing or have ended, so we’re holding off on any changes to our fair value estimate for narrow-moat Embraer.
Prior to the reports, Embraer’s enterprise value was roughly $5 billion, which, even if we assume a takeover premium, is a pittance for Boeing given our forecast for $10 billion of free cash flow this year coupled with its strong balance sheet. The Brazilian government is the linchpin for any deal, and we note that, similar to other non-U.S. aerospace and defense companies, the government holds a golden share in Embraer that enables it to block a change in control. Boeing has reportedly made assurances to the Brazilian government on jobs, manufacturing sites, defense programs, and other items of interest for the Brazilian state.
Given Boeing’s difficulty selling the 737 MAX 7 coupled with Airbus’ plans to take a majority stake in the Bombardier C Series, we’re not surprised to see Boeing courting Embraer. We think the strategic rationale revolves around four points: 1) Embraer plugs a hole at the low-end of Boeing’s product lineup, 2) Embraer gives Boeing access to technology for smaller jets for application on a next-generation narrow-body aircraft, 3) Embraer expands Boeing's global manufacturing footprint, and 4) the Brazilian firm adds a military transport aircraft (Embraer’s KC-390) to Boeing’s portfolio, which is missing following the C-17’s termination.
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Chris Higgins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.