Market Overview

Analyst: Brazilian Government An Obstacle To Boeing-Embraer Merger

Analyst: Brazilian Government An Obstacle To Boeing-Embraer Merger
Related BA
Make Mine Vanilla: Dull Jobs Report Might Be Just What's Needed After Wild Week
Ahead Of Mid-Week Pause, Investors Fret Over Trade Pact Details
US Market Indexes Close With Gains Wednesday (GuruFocus)
Related ERJ
Bolsonaro Wins Brazilian Presidential Election
Brazilian Stocks Soar On Election Results
Brazilian court lifts injunction blocking Boeing-Embraer deal (Seeking Alpha)

On Thursday, Boeing Co (NYSE: BA) confirmed a Wall Street Journal report that the aerospace giant is looking to buy Brazilian commercial jet maker Embraer SA (ADR) (NYSE: ERJ).

The companies said in a release they are engaged in discussions regarding a potential combination.

The Analyst

Buckingham Research Group analyst Richard Safran reiterated a Neutral rating and $203 price target for Boeing, suggesting 31 percent downside from current levels.

The analyst said his view on Boeing remains intact despite the M&A discussion, as he projects little upside to production rates, deliveries, earnings or cash flow expectations.

The Thesis

The talks could result in an outright acquisition, joint venture, minority interest or other link, Safran said in a Thursday note. (See Safran's track record here.) 

The analyst said he's skeptical about a Boeing-Embraer combination, given the challenge of securing approval from the Brazilian government.

"We don't think the Brazilian government will look favorably on foreign ownership (in this case U.S.) of a strategic asset like ERJ," he said.

Even if a deal isn't reached, Buckingham Research expects both companies to move closer through either a joint venture or Boeing taking a minority interest in Embraer. Some new agreement between the companies could come out of the ongoing discussions, according to Buckingham. 

Although regional jet and business jet segments have not been on Boeing's radar historically, that has changed with the recent executive management changes at Boeing and Boeing Commercial Aircraft, Safran said. 

See also: Can Boeing Shares Lift Off Soon? Credit Suisse Sees 29% Upside From Here

Going by the 10-14 times next-12-months EBITDA valuations for recent aerospace deals, the firm said Boeing's potential buy of Embraer could be priced in the $6 billion to $9 billion range, a premium to Embraer's valuation of $3.7 billion. With Boeing recently announcing a $18-billion share repurchase authorization, Safran said it may have to use a combination of debt and/or free cash flow in the event of an all-cash deal.

Boeing's interest in Embraer could have been motivated by AIRBUS SE (OTC: EADSY)'s recent CSeries joint venture with Bombardier Inc (OTC: BDRBF), which could pose a challenge to the B737 MAX 7 and other MAX models.

"In our view, a BA acquisition of ERJ would not appreciably change the dynamic between BA and Bombardier and the issues surrounding Canadian subsidies and MAX pricing," Safran said. 

Another motivation for a Boeing-Embraer deal could be to acquire lower-cost manufacturing and development sites, the analyst said: Boeing could view Embraer as a potential site for manufacturing its next-gen narrow body aircraft.

With Boeing's sales force and global services likely to enhance Embraer's product offerings, the firm views a Boeing-Embraer tie-up as a potential negative to Dassault Systemes SE (ADR) (OTC: DASTY), General Dynamics Corporation (NYSE: GD)'s Gulfstream and Textron Inc. (NYSE: TXT).

The Price Action

Boeing has gained over 87 percent year-to-date.

Related Link:

The Boeing-Bombardier Feud Intensified Thanks To Airbus

Latest Ratings for BA

Oct 2018Credit SuisseMaintainsOutperformOutperform
Oct 2018Canaccord GenuityMaintainsHoldHold
Aug 2018UBSAssumesNeutralBuy

View More Analyst Ratings for BA
View the Latest Analyst Ratings

Posted-In: Buckingham Research Group Richard SafranAnalyst Color Price Target Reiteration M&A Analyst Ratings Best of Benzinga


Related Articles (BA + BDRBF)

View Comments and Join the Discussion!

Latest Ratings

MOSJP MorganDowngrades33.0
BACKeefe Bruyette & WoodsDowngrades29.0
AMTMorgan StanleyDowngrades170.0
EBAYMorgan StanleyDowngrades33.0
UNITMorgan StanleyDowngrades16.0
View the Latest Analytics Ratings
Don't Miss Out!
Join Our Newsletter
Subscribe to:
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Fintech Focus
Your weekly roundup of hot topics in the exciting world of fintech.
Thank You
for registering for Benzinga’s newsletters and alerts.
• The Daily Analysts Ratings email will be received daily between 7am and 10am.
• The Market in 5 Minutes email will be received daily between 7am and 8am.
• The Fintech Focus email will be received every Friday between 2pm and 5pm.

Hovnanian Posts A Q4 Beat, But Is The Resulting Upside Overdone?

L Brands Up 50% In 3 Months: Will The Rally Continue In 2018?