Good morning, ladies and gentlemen, welcome to Embraer conference call to discuss the Embraer and Boeing proposed partnership. Thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions to participate will be given at that time. If you should require assistance during the call, please press the star key followed by zero two. As a reminder, this conference is being recorded and webcasted at ri.embraer.com.br. This conference call includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance.
These forward-looking statements are subject to risks, uncertainties, and assumptions, including, among other things, general economic, political, and business conditions in Brazil and in other markets where the company is present. The words believes, may, will, estimates, continues, anticipates, intends, expects, and similar words are intended to identify forward-looking statements. Embraer undertakes no obligations to update publicly or revise any forward-looking statement because of new information, future events, or other factors. In light of these risks and uncertainties, the forward-looking events and circumstances discussed on its conference call may not occur. The company's actual results could differ substantially from those anticipated in forward-looking statements. Participants on today's conference call are Mr. Paulo Cesar de Souza e Silva, President and Chief Executive Officer. Mr. Nelson Salgado, Executive Vice President, Finance and Investor Relations. Mr. Eduardo Couto, Director of Investor Relations.
I would like now to turn the conference over to Mr. Nelson Salgado. Please go ahead, sir.
Good morning, everybody. I'd like to thank you for taking the time and attending Embraer's Investors Conference. I'd like to start by announcing that Embraer board has approved the strategic partnership with Boeing, subject to golden share approval, followed by ratification by the board, approval of shareholders and antitrust authorities. The strategic partnership includes the creation of the Commercial Aviation Joint Venture, owned 20% by Embraer and 80% by Boeing. The creation of the KC-390 Joint Venture, owned 51% by Embraer and 49% by Boeing. The companies will also enter into long-term operational contracts related to engineering, intellectual property, R&D, support, and supply chains. Moving to slide four, we highlight the main changes to the information disclosed on July the 5th. Enterprise value for 100% of the Commercial Aviation JV of $5.26 billion.
Boeing Brazil will acquire existing shares and subscribe for new shares, representing 80% stake in Commercial Aviation JV at an aggregate value of $4.21 billion. Proceeds net of separation costs estimated to be around $3 billion. Any potential reductions in costs will be shared by Embraer and Boeing equally. Embraer will have a put option to protect for its 20% remaining stake. That put option can be exercised at deal price adjusted by inflation during the 10 years of the lock-up period, and at fair market value price after the lock-up period. The KC-390 JV. Embraer will own a 51% stake, and Boeing will own a 49% stake in the KC-390 JV. KC-390 JV will promote new markets and applications for the KC-390 multi-mission aircraft product. Embraer and Boeing will collectively make cash and asset contributions into the KC-390 JV.
Also, in this case, long-term operational contracts will be signed to support the JV. Moving to slide five, we present the transaction summary. Regarding structure and ownership. Commercial Aviation JV will be controlled by Boeing, 80% ownership. Headquarters, operations, and management will remain in and be committed to development in Brazil. Improved competitive position and Boeing's marketing and procurement resources to accelerate E2 ramp-up. Embraer will remain a publicly listed company in Brazil, Novo Mercado, and in the U.S. Focus on executive jets and defense and security business units. We'll retain 20% stake in Commercial Aviation JV and benefit from anticipated synergies. KC-390 JV will be controlled by Embraer, 51% ownership. Accelerated global market penetration and increased sales. On the support agreements. Long-term agreements spanning R&D, engineering, supply chain, IP, and others expected to generate annual cost synergy of at least $50 million for Embraer.
Embraer will benefit financially from strategic alignment in procurement, engineering, and other areas. Regarding capital structure and liquidity. Embraer will be in a strong net cash position of around BRL 2.6 billion at deal closing. A portion of this liquidity is expected to be distributed to shareholders. All existing bonds will migrate to the Commercial Aviation JV. Embraer will retain a put option for its 20% stake in the Commercial Aviation JV. Finally, about the timing and approvals. Execution of definitive transaction documents, still subject to approval from the Brazilian government, followed by ratification by the Embraer Board of Directors. Closing subject to approval by shareholders and antitrust authorities and other customary closing conditions. If all approvals are obtained on time, transaction expected to close at the end of 2019. With that, we close this part of our conference and open now for Q&A.
Operator, can you go ahead?
Thank you. The floor is now open for questions. If you have a question, please press star nine. Remembering, if you have a question, please press star nine. Remembering, if you have a question, please press star nine. Remembering, if you have a question, please press star nine.
Operator, can you take the first question from Myles Walton from UBS, please?
Okay. Mr. Myles Walton from UBS, would you like to make a question?
This is Louise Fedon for Myles. Good morning.
Good morning, Louise.
Just curious, are there any additional supply chain agreements or synergies in the deal, in regards to the executive aviation business?
Yes. In terms of synergies, as we put on the slide five of the presentation, we are anticipating conservatively around BRL 50 million in synergies for executive and defense on an annual basis. That's what we have so far.
Okay. Sorry, I hadn't seen the slides yet. Also, have you guys come up with an after-tax value for the put stake? Is there a similar amount of sort of tax leakage?
No, it will depend a lot, right, Louise? Basically, now we have two put option. One, during the lockup period of 10 years, which will be the due price adjusted by the U.S. inflation. After the lockup period, we're going to have another put option that will be at fair market value. As we exercise the put, we need to see what is the book value, what is the price, and then we can see if there will be any tax, or not. At this point, I think you should assume 20% of the due price as the put option date.
Okay, thank you. Just last one, the proportion of D&A and free cash flow commercialization 2018. You guys have a rough number, I guess, on a segment basis?
We are not giving guidance at some point. What we can tell is that, revenues for Executive and Defense, today, they're around $2.5 billion-$3 billion, which represents around 40%-45% of our business. In terms of margin, we are in the beginning of a turnaround, we don't see the past numbers as the best way to look. We are confident that we're going to turn around Executive and Defense. Maybe Nelson can give a little bit more color on that.
Yeah, Myles.
Sorry. I was just asking just specifically the Depreciation Amortization for those two businesses, the percentage of the total.
It's not so different from the revenue-
Okay. Thank you.
Mr. Cai, Cowen Group, would you like to make a question?
Yes. Thank you very much. You said that how much is the dollar value of the bonds that you expect to go over to the JV? Is that just at the time? Is that based on now? How big should that be?
It's around $3.5 billion.
Okay.
Yeah. Just to be clear, Cai, we are expecting to move all our bonds to the JV. Of course, we still need the approval of the transaction from the shareholders, really to define the best strategy for the bonds. We are anticipating to move all the outstanding bonds to the JV.
That, I assume, is the reason that the price Boeing is paying went down from $4.75 billion to $4.2 billion.
No, the price actually went up. The price went up from $4.75 billion to $5.263 billion. That's the enterprise value for 100%, $5 billion, $263 million. 80% of that now is $4 billion and $200 million. Before, it was $3 billion, $800 million. It increased $400 million. The net proceeds, including all separation costs, which includes taxes and also all costs to separate the companies, duplicate IT, duplicate warehouse, infrastructure, all of that, we expect from the $4.2 billion, which is the 80% of the $5.263 billion, to be around $3 billion net.
Okay. Walk me through. What do you expect the separation costs to be, and roughly when would they occur?
Yeah.
As Edu mentioned, there will be lots of activities that we will perform starting in 2019, as soon as we have proper approval for that, so that we can prepare the companies to operate separately. That will involve changes in areas like IT, some infrastructure preparation for relocation of people and activities from all types. It's generally lots of different activities that we have to perform to prepare the companies to operate as separate companies.
Yeah. If I may add, Nelson, it's important to say, Cai, that those assumptions are conservative. We are going to work together, to reduce that up to the closing, and the benefits of that will be equally split between Embraer and Boeing.
Will the costs themselves be equally split?
No. As we said, we are assuming certain costs, which include taxes and all the separation costs that Nelson just mentioned. As of now, we are assuming BRL 4.2 billion to go down to around BRL 3 billion after all these costs. If in the end, we spend less than that, we're going to equally share that, because they raised the price. We believe it's fair to share if we spend less than what we are anticipating.
Wonderful. Last quick one. On the KC-390 JV, you own 51%, you share the costs 51%-49%, do they have to put any cash in upfront for their 49%?
Yes, both sides will have to put some cash and assets. We still have to work on the details of that. Both sides will have to put cash and assets as well.
It's important, Cai, to make clear that the price, for the Commercial JV, the enterprise value of $5.263 billion, has no relation with the KC-390 JV. This is the price, the enterprise value only for the Commercial Aviation business, okay?
Got it. Okay. Thank you.
Thank you.
Remembering, if you have a question, please press star nine. Remembering, if you have a question, please press star nine. Remembering, if you have a question, please press star nine.
Okay. I think we're having some technical problems to get the questions, and some investors were also having difficulties to connect. Do we have any other question on the queue, operator?
No, we don't. There are no questions, I would like to turn the floor over to Mr. Paulo Cesar de Souza e Silva for final considerations. Paulo, you may proceed.
Thanks very much. Thanks for joining us this morning. A final comment, this is one important milestone towards accomplishing this union between Boeing and Embraer and with the view there to accelerate growth in the global aerospace market. The partnership, Boeing and Embraer, will form the most important and the largest aerospace group in the world and together. We are set to deliver more value to our shareholders, to our clients, to our employees and in our case, here in Brazil, for Brazil in general, for the Brazilians in general. As already described, the next step now is the approval from the Brazilian government and then a general assembly for our shareholders to appreciate this transaction. We will keep you informed. Thank you very much for this call.
Just one final point. It's Edu here. Just want to say that the investor relations team is available to answer any question. We had some technical issues on the call, I want to apologize. If you still have any questions, feel free to contact us directly. Okay.
This concludes today's question and answer session. That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.