Leeham News and Analysis
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Leeham News and Analysis
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Boeing walks from Embraer joint venture
By Scott Hamilton
April 25, 2020, © Leeham News: Boeing today pulled the plug on its proposed joint venture with Embraer. It claimed the Brazilian company failed to meet all the terms and conditions required of the JV agreement.
“Boeing has worked diligently over more than two years to finalize its transaction with Embraer. Over the past several months, we had productive but ultimately unsuccessful negotiations about unsatisfied MTA conditions. We all aimed to resolve those by the initial termination date, but it didn’t happen,” said Marc Allen, president of Embraer Partnership & Group Operations. “It is deeply disappointing. But we have reached a point where continued negotiation within the framework of the MTA is not going to resolve the outstanding issues.”
Global regulatory approval of the JV was won by nine of 10 regulators. But it has been held up by the European Union, which 
repeatedly halted consideration while asking for more information. A June 23 target date for a decision was recently reset to August.
The JV agreement provides for a $100m break up fee to be paid by Boeing if anti-trust approval isn’t forthcoming. By terminating the agreement early, Boeing hopes to avoid paying the fee, LNA is told.
Embraer is sure to protest and take an opposite position. Last month, the company said it continued to “take all the necessary actions” to complete the deal.
As recently as March 24, Boeing CFO Greg Smith “stressed the strategic value” of the partnership.
Deteriorating financial condition
But Boeing’s deteriorating financial position, especially since the COVID crisis erupted in the US this year, raised widespread questions whether Boeing can afford the $4.2bn price tag to consummate the JV.
Accepting a federal bailout—which Boeing has yet to do—and spending billions to acquire 80% control of a foreign company would present huge political backlash. Terms of a federal loan may preclude this action anyway. Delta Air Lines CEO Ed Bastien said Delta is precluded from providing financial aid to its equity partners, including Virgin Atlantic, as a condition of its federal monies.
Boeing is preparing to lay off 10,000 workers as early as next week. Spending billions to send work offshore would also present a huge political backlash. It would almost certainly lay a foundation for a strike in 2024 by the IAM 751, Boeing’s powerful touch-labor union. The union months ago urged members to begin saving for a strike then over other, unrelated issues.
JP Morgan analysis
JP Morgan provided this cash analysis April 23:
Boeing should need more capital in 2020; our starting point is $10bn-15bn. Our $17bn of cash burn, the Embraer deal ($4bn) and the final dividend payment ($1bn) make for $22bn of cash out in 2020 and we assume management wants to maintain the YE19 cash balance of ~$10bn. January’s term loan funds $14bn of this requirement, leaving an $8bn gap and we assume the company raises $10bn. There is also a ~$10bn revolver that we think Boeing prefers to leave untapped as well as ~$6bn of Commercial Paper to repay. As noted, the cash requirement could easily be above our estimate and regardless, a larger capital raise vs the requirement can help limit the perception that Boeing might return to the market later. Moreover, we don’t think Boeing would have hired advisors to engage with Treasury about government support if the funding requirement was only a few billion dollars; instead, this step suggests to us something more significant.
Boeing did not specify what terms and conditions were not met.
Airfinance Journal reports the JV agreement “indicates Boeing must pay Embraer a termination fee of $100m for the early termination of the venture. Embraer incurred $34.8m in costs associated with the carve out or separation of its commercial aviation business in the third quarter of 2019.”
Does LNA has any insight on what might happen to Embraer now? Seems like they are in awkward position to compete with Airbus. Would be possible to another company to step in and buy their commercial aviation business, since it is already split from main business?
There could be potential investors from China and maybe Russia or Japan that would be interested.
Japanese have long had interests in Brazil, JAL operated to there for decades.
(I suspect Japanese money was behind a surge of soybean production after the US stupidly restricted exports. A decade later Brazilian production resulted in prices plummeting due that extra supply.
(I presume it took a few years for farmers to figure out how to farm soybean well. Subleties of soil and climate and even equipment can make a difference. For example, when what is now canola started to be produced in western Canada, those who used conventional combine harvesters had to modify them to reduce breakage of the oil pods. (Combines have paddle wheels that hit the plant tops to topple them onto the harvesting bed, then process them further behind. Points to anyone who knows why the name ‘combine’, extra points for knowing what ‘canola’ is.) In eastern Iowa soybean is rotated with corn, which was already grown in Brazil, though alternatively ammonia injection is used to put nitrogen back into the soil.)
Communist China and Russia have been investing in very troubled regimes, such as Venezuela and in Africa.
Protectionists are idiots.
(The Law of Unintended Consequences gets them, though many things are quite predictable. For example, according to the book The Doomsday Myth:
– Brazil forbid export of rubber tree seeds/clippings, but not surprisingly some got out to SE Asia where ‘the rest is history’.
Until Nationalsozialistische’s navy blocked shipments to Europe.
– Fortunately for the control freaks of the Brit and Dutch gummints, whose investors financed the SE Asian production, people in the US had been doing the research blocked in Europe, so artificial rubber was becoming available.
– And production of latex for the most demanding applications, like aircrew masks, used plantations of milkweed started in the NE US. It’s a hard way to get latex, but if the need is strong. (Meanwhile Nationalsozialistische was of course madly researching substitute processes for products like gasoline, research that South Africa revitalized decades later.)
I think anyway that is a positive news for Embraer and his mid to far future. Boeing showed that as far that is not so capable of healing itself. So why allow to infect a healthy company with McB bug?
This was a bad deal from the get go, Embraer will thrive.
Boeing dealing with the Brazilians on Embraer JV, is quite a different scenario than Airbus and the Canadian Bombardier.
Boeing ventured in dealing with the worse client being the Brazilian Military and with Crook Bolsonaro & Son. Two years ago, when these talks started, I thought, firstly, Boeing was venturing in this suicidal trip ignoring that they were dealing with the worse of Brazilian mafia elites, and they were going to have Boeing as Lunch without a Fork/Knife, and Secondly, Boeing wanted by all means to screw Airbus/Bombardier recent deal in those days, the same Booboo they made with their B737 MAX, but was to neutralize Airbus success-story with Bombardier. These are more of Fiasco’s Boeing adventurism to prevent competition has brought them to Disastrous outcomes. Next will be the defining moment of the WTO into defining the Boeing Subsidies and eventual tariffs which will be applied by the EU on Boeing. We shall wait and See the outcome.
“Boeing ventured in dealing with the worse client being the Brazilian Military and with Crook Bolsonaro & Son. ”
_US Crook_ Bolsonaro.
He is not all too different to the range of US anointed Military turned Dictators. ( all prepped in “The School of the Americas” )
IMU the previous much saner Brazilian administration would not have touched the Boeing deal.
Before you blow the trumpet of the “previous much saner Brazilian administration”.
May I suggest you start reading up on operation Lava Jato.
I never wrote that they were sane in absolute terms 🙂
That is more a corruption “persons” affair that a “basic government” affair, isn’t it?
How are the peers of Bolsonaro involved?
I don’t think Bo0eing broke it up early.
Cutoff date was the 24th and that is when they did it.