Boeing Plans Separate Tie-Up With Embraer For Defense

Boeing [BA] on Thursday moved a step closer to establishing a strategic partnership with Brazilian aircraft maker Embraer [ERJ], announcing a pending $3.8 billion majority ownership stake in a commercial aircraft joint venture and also said the two companies would create another joint venture in defense.

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Embraer's KC-390 multi-mission transport and tanker aircraft. Photo: Embraer

A key part of the defense joint venture will be Embraer’s multi-mission transport aircraft for the medium airlift market. Last December, the KC-390, which is being developed for cargo, transport and aerial refueling missions, achieved initial operational capability with the Brazilian air force.

“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, Nelson Salgado, Embraer’s executive vice president for Financial and Investor Relations, said in a statement.

Sheila Kahyaoglu, an aerospace and defense equity analyst with Jefferies, said in a client note that the pending defense joint venture expands an existing agreement between the two companies for jointly marketing and supporting the KC-390. She said Boeing won’t have operational management of the venture.

In the cargo and aerial refueling space, Boeing is in low-rate production of the KC-46 aerial refueling tanker for the U.S. Air Force and also built the C-17 transport for the Air Force. The KC-46 can carry a significantly larger fuel load than the KC-390.

Embraer’s Defense & Security segment posted $950.7 million in sales in 2017 and at the end of the year had a backlog of $4.2 billion. In addition to the KC-390, the company also manufactures the A-29 Super Tucano single-engine turboprop aircraft it offers for training, light attack, and intelligence, surveillance and reconnaissance missions.

Embraer is teamed with Sierra Nevada Corp. to offer the A-29 for U.S. Air Force light attack missions and the aircraft is in operation with the Afghan air force.

Embraer’s defense business, which represented about 16 percent of the company’s overall sales last year, also offers other aircraft for multi-mission purposes, command and control systems, tactical radio systems, and radar.

Boeing’s announcement with Embraer on Thursday was focused squarely on a partnership around commercial aircraft, with the agreement calling for Boeing to take an 80 percent stake in the joint venture. Embraer’s commercial aircraft operations, which generated $3.4 billion in sales in 2017, are valued at $4.8 billion in the transaction.

The memorandum of understanding between the two companies is non-binding at the moment and a definitive agreement is expected in the coming months. The final deal is expected to close in 12 to 18 months after a definitive agreement is reached. Brazil’s government, Embraer shareholders, and a number of other governments must also approve the deal.

Embraer offers Boeing an entrée into smaller, regional planes, those that typically carry fewer than 150 passengers. Boeing’s commercial aircraft are typically aimed at airlines carrying 150 passengers or more.

Boeing expects the commercial joint venture to be accretive to its per share earnings beginning in 2020 and to generate annual pre-tax cost savings of about $150 million by third year.

Boeing will have operational control of the commercial joint venture, although management will be based in Brazil.

The proposed commercial joint venture follows an agreement last year by Boeing rival Airbus Group to acquire a majority stake in Canada’s Bombardier for the C Series regional jet aircraft, which is aimed at the 100 to 150 seat market. Airbus and Bombardier closed the C Series transaction on July  1.

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