After months of talks, the world's largest aerospace company Boeing Co. (BA) - Get Boeing Company Report and its Brazilian counterpart Embraer SA (ERJ) - Get Embraer S.A. Sponsored ADR Report have agreed to establish a strategic partnership, allowing the Chicago-based company to control Embraer's commercial business.
Under the terms of the agreement, Boeing and Embraer will form a joint venture, consisting of Embraer's commercial airplane and services business and Boeing's commercial development, production, marketing and lifecycle services operations. Boeing will hold an 80% ownership stake in the joint venture, and Embraer will own the remaining 20%.
The transaction values Embraer's commercial airplane operations at $4.75 billion, meaning Boeing's 80% stake is worth approximately $3.8 billion. Boeing did not disclose any advisers for the transaction.
Boeing expects the proposed partnership to be accretive to its earnings per share beginning in 2020 and anticipates annual pre-tax cost synergies of about $150 million by its third year.
While no payment details were provided, Boeing is expected to pay for its share of the venture in cash, Reuters reported, citing a person familiar with the matter.
"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," Boeing Chairman and Chief Executive Officer Dennis Muilenburg said in a statement. "This important partnership clearly aligns with Boeing's long-term strategy of investing in organic growth and returning value to shareholders, complemented by strategic arrangements that enhance and accelerate our growth plans."
Shares of Boeing rose 1.3% to $337.22, while Embraer stock fell 2.9% to $25.46 at 9:30 a.m. New York time.
The two companies confirmed in December 2017 that they were discussing a potential multibillion-dollar deal, but had been working since then to reach an agreement that would satisfy the Brazilian government, which has a so-called golden share that gives it veto power over changes of control.
Morgan Stanley analysts, based on their understanding of the news, said that with the structure of the deal finalized, "the government would still have to audit/review the transaction further, a process that could take several months to be completed." And once the review is complete, the transaction should be submitted to Embraer's board of directors, "potentially entailing another month or so for final approval," Morgan Stanley analyst Ricardo Alves and Vitor Sanchez wrote in a July 5 research note.
Pending approval, Embraer's Brazil-based management will lead the commercial aviation joint venture, but Boeing will have operational and management control of the new company. Management is expected to report directly to Muilenburg.
"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," the company said in a statement.
The Boeing-Embraer deal "blunts" the Airbus-Bombardier C Series venture and allows the Brazilian aerospace company to leverage the Boeing market teams, according to Bloomberg Intelligence analyst George Ferguson.
Additionally, both companies will create another joint venture to promote and develop new markets and applications for defense products and services, especially the KC-390 multi-mission aircraft, based on jointly-identified opportunities, they said.
"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 of Financial and Investor Relations.
The companies said finalization of the financial and operational details of the partnership and negotiations of the transaction agreements are expected to continue in the coming months. Pending shareholder and regulatory approvals, including approval from the Brazilian government, the transaction is expected to close by the end of 2019.