Boeing, Embraer Announce Regional Jet Joint Venture
We believe the tie-up is attractive for Boeing but give the arrangement about a 50/50 shot of going forward.
Wide-moat Boeing (BA) and narrow-moat Embraer announced plans to create a joint venture that would see Boeing take over the Brazilian aircraft manufacturer’s regional jet operations with an 80% share in the entity; Embraer would hold the remaining 20%. The JV will be based in Brazil and led by Embraer’s management team, reporting to the Boeing CEO. Boeing and Embraer think the JV should close before the end of 2019, but we think the arrangement has about a 50/50 shot of going forward because the Brazilian government hasn’t officially approved the deal and the country will hold presidential elections this October.
Boeing plans to make a cash payment of $3.8 billion to Embraer, implying a $4.75 billion valuation. This valuation results in an 18 times EV to EBIT multiple based on our 2018 forecast for the regional jet unit’s operating profit. However, we think profits are depressed due to the E2 ramp, and the valuation multiple sits at a more reasonable 15 times our normalized operating profit before any cost synergies. This all suggests that Boeing didn't get the business cheap but neither did it grossly overpay; Boeing shares were flat on the news.
We continue to believe that the tie-up is attractive for Boeing because it gives the U.S. company access to Embraer’s engineers for its next aircraft development program and provides additional manufacturing locations/options outside of Washington state. If the tie-up is consummated, we think the launch of Boeing’s next generation midsize aircraft is more likely. We don’t expect to make material changes to our Boeing fair value estimate of $309. Embraer shares are trading down double-digit percentages, but we’re holding off on a decreasing our fair value estimate of $25 on the ADRs given the uncertainties surrounding government approval. That said, testing the JV set-up in our model indicates that it will shave about 5% off our fair value estimate for Embraer.
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Chris Higgins does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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