Boeing still has work to do to secure Embraer acquisition

Boeing Co.'s purported bid for Embraer SA looks low.

Boeing has been aggressively pursuing a takeover of the Brazilian regional jet maker, a remarkable shift for a company that dubbed a similar combination struck by Airbus SE and Bombardier Inc. in October "a questionable deal" that wouldn't force it to change its strategic path. Many details are still being sorted, the most important being whether the Brazilian government, which has veto power, will support an acquisition.

But at least one thing has reportedly been worked out: the price. According to the Wall Street Journal, Boeing and Embraer have informally agreed to a deal at ... $28 a share.

That's hardly the "relatively large" premium that previous reports had indicated was coming. A bid of $28 would be 40 per cent higher than where Embraer was trading before news emerged of Boeing's interest. That's not insignificant, but also not atypical in M&A, especially lately. It's also worth noting that Embraer's stock had taken a hit this fall as the company faced the prospect of heightened competition from the Bombardier-Airbus combination, a problem it could better handle as part of Boeing.

Investors were clearly expecting more. The American depositary receipts had climbed to about $27 heading into Friday, a level that's untenable if the ultimate price is just $1 higher because the deal hasn't even officially been inked yet and faces significant regulatory hurdles. Thus, news of the price sent Embraer's ADRs plummeting as much as 7 per cent.

Shareholders had every right to be more optimistic. Embraer is a crown jewel for Brazil. While Boeing is still negotiating with the government over what would happen with Embraer's defense business and how much say politicians would have going forward, a hefty offer was assumed to be part of its argument.

The regional-jet hole in Boeing's lineup has been laid bare by its trade dispute with Bombardier over claims the Canadian company used low prices to unfairly compete for a Delta Air Lines Inc. order for which Boeing wasn't even a contender. If Boeing is serious about catching up to the new Airbus-Bombardier union, it doesn't have many other options that match the scale of Embraer.

And yet Boeing's offer values Embraer's ADRs at a discount to the median multiple paid in major aerospace and defense deals over the past decade, according to data compiled by Bloomberg.

Takeovers targets of more than $1 billion have typically commanded about 13 times Ebitda.

Not all of the acquisitions in this industry are perfect comparisons; Embraer has no hope of fetching the kind of pricey valuation that higher-margin avionics supplier Rockwell Collins Inc. did from United Technologies Corp. last year, for example.

But Lockheed Martin Corp. paid 13 times Ebitda to acquire helicopter maker Sikorsky from United Technologies in 2015, or a little over 10 times if you adjust for the benefits of tax maneuver. Something in that ranges seems more reasonable for Embraer.

Boeing still has work to do to secure an Embraer acquisition. Perhaps that should include re-evaluating the price. The Brazilian government isn't the only stakeholder it has to please.

*Bloomberg