Shares of Embraer S.A. (ERJ 0.26%) were up by 17% as of 11:30 a.m. ET Tuesday after the Brazilian planemaker announced plans to spin off its Eve urban air mobility solutions (i.e., "air taxis") subsidiary in an IPO.
Specifically, it will use a SPAC IPO. Embraer will merge Eve with special purpose acquisition company Zanite Acquisition Corp. (ZNTE) and rake in the profits for itself.
Are you surprised by this? You shouldn't be. Embraer has been mulling the possibility of spinning off Eve to Zanite since way back in June. Yet the valuation of the deal seems to have caught some investors by surprise.
In June, if you recall, analysts were predicting a $2 billion valuation for an Eve-Zanite combination (although at that time, I did suggest that the number could rise). On Tuesday, Reuters reported that the valuation did in fact rise, and that the merged company (to be known as "New Eve") will be valued at $2.9 billion -- 45% above the previously mooted price.
In its own press release on the transaction, Embraer provided further details:
- Though it will be spinning off the subsidiary, Embraer will retain an 82% ownership stake in New Eve. (Reuters notes that companies including SkyWest (SKYW 2.23%), BAE Systems (BAES.Y -0.02%), Rolls-Royce (RYCEY -1.14%), Republic Airways, and Azorra Aviation will also take stakes in the new company).
- Embraer will inject $175 million of its own cash into New Eve to help get the business off the ground.
- Once the transaction is complete, New Eve will list on the NYSE, with a ticker yet to be announced.
Still, it's glaringly obvious that the single biggest factor in Tuesday's Embraer price spike was the deal's valuation: The market cap for all of Embraer currently sits at $3 billion, while this single subsidiary of the company is being valued at $2.9 billion. Result: If you're optimistic about the future of air taxis, you can now buy Embraer stock, get a piece of a popular air taxi company (New Eve) -- and get South America's biggest plane builder essentially for free.