Boeing Drops $4 Billion Embraer Deal: What It Means For Boeing Stock

The Saturday, Boeing ( BA -0.51% ) ended a $4 billion deal that would have given him control of the commercial aerospace operations of To kiss (ERJ -2.52% ) after a Friday night deadline came and went without the two sides settling the final details.

In a press release, Marc Allen, president of Boeing’s Embraer partnership unit, called the decision “deeply disappointing” but said “we have reached a point where continued negotiations…will not resolve not the pending issues”.

The termination, like the original deal itself, is likely to be highly contentious, and the decision has both ups and downs for Boeing.

Why Boeing shareholders should rejoice

The world has changed a lot since these two longtime partners decided to join forces. In 2017, Boeing had a multi-year backlog, billions in cash on its balance sheet and a roadmap for further expansion. Archival Airbus (EADSY 0.70% ) had acquired the C-Series line of small jets from Bomberand Boeing saw the association with Brazil’s Embraer as a way to counter the C-Series threat and better compete in the small jet space.

Boeing agreed to pay $4.2 billion for an 80% stake in Embraer’s commercial aircraft unit, a rich but fair valuation at the time. However, amid the COVID-19 pandemic, which has caused travel demand to evaporate and left Airlines companies ill-positioned to buy new aircraft, Embraer’s total market capitalization fell to around $1 billion.

As a result, heading into the weekend, Boeing was close to striking a deal to pay more than four times what investors currently estimate Embraer’s assets are worth. Even that Embraer valuation was likely inflated due to the ongoing deal. Embraer shares are expected to fall on Monday after Boeing’s decision to pull out.

Image source: Embraer.

Boeing is also much less cash-rich than it was two years ago. International regulators’ decision to ground the 737 MAX in March 2019 will likely cost the aerospace giant more than $20 billion in additional expenses, customer penalties and prepayments to keep the supply chain running. .

The pandemic has only worsened Boeing’s cash flow problems, forcing the company to temporarily suspend operations and hurt demand for new aircraft. Boeing has suspended its dividend and asked the US government for $60 billion to support the commercial aerospace sector. Given the corporate scrutiny right now, asking for money from Washington and then sending billions overseas to Embraer is probably a no-start.

Buying Embraer, whatever the price, is arguably a distraction Boeing doesn’t need right now. Furthermore, purchasing Embraer at the agreed price would have been a huge drain on scarce cash resources.

Why Boeing shareholders should be disappointed

Nevertheless, Boeing’s rationale for wanting to buy Embraer was solid. The collapsing deal leaves a gaping hole in Boeing’s product offering.

Indeed, Boeing pushed the C-Series into the arms of Airbus by aggressively attacking Bombardier’s sales strategy, accusing the Canadian company of selling the product in the United States below cost. The C-series, renamed Airbus A220, has attracted considerable interest from customers, including Delta Airlines and Jet Blue Airways.

In recent years, Boeing has tried to convince airlines to opt for smaller versions of its 737 instead of an A220-sized plane, in part because it doesn’t really have a alternative. Embraer’s next-generation E2 jets would have slotted under the 737, giving Boeing an attractive offer for customers looking for a plane that size.

ERJ Chart

Three-Year ERJ Price Chart given by Y-Charts

Unfortunately for Boeing, the smaller jets look likely to be big sellers in the years to come. Before the pandemic, global airlines were already turning away from big jets to smaller planes. This trend is expected to accelerate if air traffic demand remains below pre-pandemic levels for an extended period.

The success of the A220 is due in part to the fact that airline customers have been forced to wait and see what happens to the Boeing/Embraer deal. Even combined, Boeing/Embraer faced an uphill battle to sell the E2. Embraer will likely find the challenge much more difficult on its own.

So how should an investor feel today?

Given all the other problems that Boeing is facingand the challenges of integrating massive, cross-border deals, even in the best-case scenario, existing investors should be happy that this deal fell through.

Ideally, both parties can now come back to the table and find a compromise. However, that might be easier said than done. It appears the talks that led to Boeing’s decision to wind down operations were strained.

For its part, Embraer does not seem in the mood to compromise. The company released a statement claiming that the agreement was “wrongfully terminated” and pledging to “pursue all remedies” against Boeing.

“Embraer strongly believes that Boeing wrongfully terminated the [master transaction agreement]that he fabricated false statements as a pretext to seek to avoid his commitments to close the transaction and pay Embraer the $4.2 billion purchase price,” the company said. “We believe Boeing s engaged in a systematic pattern of delays and repeated violations of the [master transaction agreement]due to its reluctance to complete the transaction in light of its own financial situation and the 737 MAX and other business and reputational issues.”

Which means that in the short term, Boeing has one more thing to do. For potentially the rest of the decade, Boeing’s business fortunes will largely be dictated by the success of the still-grounded 737 MAX.

Boeing is focused on survival. Survival is good, but investors should be aware: the price of survival could be a loss decade in terms of commercial sales. My advice: stay away from Boeing stocks.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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