Good morning, ladies and gentlemen, and 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. 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 even for 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, estimate, continuous, anticipate, intend, expect and similar words are intended to identify forward looking statements. Embraer undertakes no obligations to update publicly or revise any forward looking statements 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 y Silva, President and CEO Mr. Nelson Salgado, Executive Vice President, Finance and Investor Relations and Mr.
Eduardo Colto, 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 by 20% by Embraer and 80% by Boeing. The creation of the KC three ninety joint venture owed 51% by Embraer and 49% by Boeing.
The companies will also enter into long term operational contracts related to engineering, intellectual property, R and D, support and supply chain. Moving to slide 4, we highlight the main changes to the information disclosed on July 5. Enterprise value for 100 percent of the commercial aviation JV of US5.26 billion dollars Boeing Brazil will acquire existing shares and subscribe for new shares, representing 80% stake in commercial aviation JV at an aggregate value of US421 $1,000,000,000 Proceeds net of separation costs estimated to be around $3,000,000,000 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 lockup period and at fair market value price after the lockup period.
The KC-three ninety JV. Embraer will own a 51% stake and Boeing will own a 49% stake in the KC-three ninety JV. KC-three ninety JV will promote new markets and multinational aircraft product. Embraer and Boeing will collectively make cash and asset contributions into the KC-three ninety JV. Also in this case, long term operational contracts will be signed to support the JV.
Moving to slide 5, 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 into 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 and will retain 20% stake in commercial aviation and benefit from anticipated synergies. KC-three ninety JV will be controlled by Embraer 51 percent ownership, accelerated global market agreements spanning R and D, engineering, supply chain, IP and others expected to generate annual cost synergy of at least $50,000,000 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 2 point around 2,600,000,000 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. And 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.
And with that, we close this part of our conference and open now for Q and A.
Operator, can you go ahead?
Thank you. The floor is now open for questions.
Operator, can you take the first question from Myles Walton from UBS, please?
Okay. Mr. Myles Walton from UBS would like to make a question.
This is Lou O'Fero on for Miles.
Good morning. Good morning, Lou.
Just curious, are there any additional supply chain agreements or synergies in the deal in regards to the 2nd aviation business?
Yes. In terms of synergies, as we put on the slide deck of the presentation, we are anticipating conservatively around $50,000,000 in synergies for us active and defense on an annual basis. So that's what we have so far.
Okay. Sorry, I haven't seen the slides yet. And then also have you guys come up with an after tax value for the put stake? Is there similar amount of sort of tax leakage?
No, it will depend a lot, right, Louis? Basically, now we have 2 put option. 1, during the lockup period of 10 years, which will be the deal 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. So 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 deal price as the put option pay.
Okay. Thank you. And then just last one, the proportion of D and A and free cash flow and commercialization in 2018, I guess 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 dollars to $3,000,000,000 which represents around 40%, 45% of our business. In terms of margin, we're in the beginning of a turnaround. So we don't see the best numbers as the best way to look. We are confident that we're going to turn around as active and expand.
So maybe Nelson can give a little bit more color on that.
Yes, Sorry.
I was just asking specifically the depreciation and amortization for those two businesses, the percentage of the total?
It's not too different on the revenue, though.
Okay.
Thank
you. Mr. Kiefer, calling group, would you like to make a question?
Yes. Thank you very much. So you said that the 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 $3,500,000,000
Okay.
Yes. Just to be clear, Kai, we are expecting to move all our bonds to the JV, right? Of course, we still need the approval of the transaction by the shareholders to from the shareholders we need to define the best strategy for the bonds. But we are debating to move all the outstanding bonds to the JV.
And that I assume is the reason that the price Boeing is paying went down from $4,750,000,000 to $4,200,000,000
No, the price actually went up. The price went up from $4,750,000,000 to $5,263,000,000 That's the enterprise value for 100 percent, five $1,000,000,000 to $163,000,000 80 percent of that now is 4,200,000,000 Before it was BRL 3,800,000,000. So it increased BRL 400,000,000. The net proceeds including all separation costs, which includes taxes and also all cost to separate the companies, duplicate IT, duplicate warehouse infrastructure. All of that we expect from the 4.2 percent, which is the 80% of the 5,263 percent to be around 3,000,000,000 net.
Okay. Walk me through what do you expect the separation costs to be and roughly when would they occur?
Yes. We 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, right? That will involve changes in areas like IT, some infrastructure generally lots of different generally lots of different activities that we have to perform to prepare the company the companies to operate as separate companies, right?
Yes. If I may add now, so it's important to say Kai that the those assumptions are conservative, right? And 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.
And will the costs themselves be equally split?
No. The costs are 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 $4,200,000,000 to go down to around $3,000,000,000 after all these costs. If in the end we do 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 question on the KC-three ninety JV, you own 51% and you share the costs 51%, 49% and do they have to put any cash in up front for their 49%?
Yes. Both sides we will have to put some cash and assets. So we still have to work on the details of that. But both sides will have to put cash and assets as well.
It's important Kai to make clear that the price for the commercial JV, the enterprise value of BRL 5,263,000,000 has no relation with the KC-three ninety JV. This is the price, the enterprise value only for the commercial aviation business, okay?
Got it. Okay. Thank you.
Thank you.
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?
Yes. No, we don't. As there are no questions, I would like to turn the floor to over Mr. Paulo Cesar de Souza y Silva for final considerations. Paulo, you may proceed.
So thank you very much. So thanks for joining us this morning. As a final comment, so it's this is one important milestone towards accomplishing this union between Boeing and Embraer and with the view that to accelerate growth in the global aerospace market. So the partnership Boeing Embraer will form the most important and the largest aerospace group in the world. And together, so we are set to deliver more value to our shareholders, to our clients, to our employees.
And in our case in Brazil for Brazil in general for the Brazilians in general. So as I already described, so the next step now is the approval from the Brazilian government and then a general assembly for our shareholders to appreciate this transaction. So we will keep you informed. And so thank you very much for this call.
Just one final point, it's Edu here. I just want to say that the Investor Relations team is available to answer any question. We had some technical issues on the call, so I want to apologize. So 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.