Originally Posted by
ProPax
I just did a little "digging". Embraer posted roughly $400mln net profit lately. The development of E-jets cost $1.5bln. Boeing paid $4.2billion for a PART of that company. Actually, a part of a part. So, from where I'm sitting, Boeing spent an enormous amount of money for what they could've gotten in their own warehouse. How in the world did that deal get through the Board and through the shareholders meeting!? We should use Muillenburg as tank armor!!!
Dig some more?
Unlike the Airbus CSeries deal, Boeing is buying a profitable business. That means it will partake in the profits from now until forever, so the present value of all those future profits has to be taken into account.
Assuming reasonable margins, a quick way to estimate fair valuation is to calculate it as a multiple of the company's EBITDA. For the aerospace industry this multiple is currently around 12-14x (
see data from PWC).
Let's take your $400mm company-wide net profit as a base. The commercial business was Embraer's only profitable division recently, which implies that the commercial division's profit was more than $400mm but the other divisions dragged the company down. So the commercial division net profit might be closer to $440mm -- this is by definition after taxes, depreciation and amortization -- with an EBITDA of maybe around $600mm. That means at prevailing multiples the commercial division's value should be between $7.2 billion to $8.4 billion.
Since Boeing is buying 80% of the division, that means Boeing should expect to pay Embraer between $5.7 billion and $6.7 billion. But Boeing only paid $4.2 billion! That's around 10x EBITDA, which is relatively cheap for the industry.
Clearly some discounting is happening (maybe in part due to the E2 transition) but Boeing seems to have done well in this transaction assuming all the due diligence checks out. Embraer's shareholders probably saw the writing on the wall and decided to extract value while they still can.
For Boeing's board members, this deal would have been a no-brainer to approve at this price.