A flight engineer performs a check flight in a CAE Inc. 7000 Series Boeing Co. 737-800 flight simulator at a CAE facility in Montreal, Quebec, Canada, on Tuesday, Aug. 13, 2019.
Christinne Muschi | Bloomberg | Getty Images
Company: CAE Inc (CAE)
Business: CAE supplies simulation coaching and important operations help options in Canada, the United States, the United Kingdom, Europe, Asia, the Oceania, Africa and the remainder of the Americas. It operates via two segments: Civil Aviation, and Defense and Security. The Civil Aviation section affords coaching options for flight, cabin, upkeep and floor personnel in business, enterprise and helicopter aviation. It additionally supplies a variety of flight simulation coaching units and ab initio pilot coaching and crew sourcing providers, in addition to plane flight operations options. The Defense and Security section operates as a coaching and simulation supplier that delivers platform-independent options to allow and improve pressure readiness and safety for protection forces, authentic gear producers (OEMs), authorities businesses and public security organizations.
Stock Market Value: $7.56B ($23.73 per share)
CAE shares over the previous 12 months
Activist: Browning West LP
Ownership: 4.3%
Average Cost: n/a
Activist Commentary: Browning West is an impartial funding partnership based mostly in Los Angeles, California and based in 2019. The partnership employs a concentrated (5 to 10 investments), long-term and basic method to investing. It focuses totally on investments in North America and Western Europe. The agency doesn’t use activism in all of its portfolio positions, however when it does, it is nearly at all times targeted on management on the board and CEO degree. Browning West needs to ensure that it has confidence within the people who find themselves making the choices with its capital and guarantee that administration’s pursuits are aligned with shareholders.
What’s occurring
On Dec. 20, 2024, Browning West sent a letter calling on CAE’s board to collaborate with the agency within the recruitment course of for a brand new CEO.
Behind the scenes
CAE Inc. is a Canadian multinational firm specializing in flight coaching and simulation applied sciences. The firm operates via two segments: Civil Aviation and Defense and Security. Civil Aviation supplies complete coaching options for personnel in business, enterprise and helicopter aviation, in addition to manufacturing flight simulation coaching units. Defense and Security supplies related options, however to protection forces, authorities businesses and different associated finish markets. CAE is the market chief in each manufacturing extremely worthwhile flight simulators and working coaching amenities for flight security. The firm additionally sells its worthwhile know-how to prospects who conduct their very own impartial coaching of flight personnel.
CAE maintains an enviable place inside a lovely and rising business. It is the most important participant in its market and no less than double the dimensions of its subsequent largest competitor, aptly named FlightSafety International, a enterprise which is owned by Berkshire Hathaway. Any enterprise with Warren Buffett’s stamp of approval is actually a sign of a good mixture of development and worth. It is difficult to consider one other business the place the expansion price is so sure. Annual international flight miles usually develop within the mid-single digits and there’s a large long-term alternative for development. As flight volumes proceed to develop, meaning extra plane, extra pilots, extra personnel, and, in fact, extra simulators and extra coaching.
Still, CAE has underperformed up to now 5 years, delivering a return of -8.75% versus a virtually 101.78% return for the 5 years prior. When the corporate reported its FY24 leads to March 2024, it missed analysts’ full-year expectations for income by about 5% and EPS by 4%. In addition, the corporate reported an working lack of $185 million in Canadian {dollars} after placing up C$466 million the 12 months prior. A hefty portion of the loss got here from a C$568 million non-cash impairment of Defense and Security goodwill and C$90.3 million in unfavorable contract revenue changes as a consequence of accelerated danger recognition on sure legacy contracts. On Nov. 12, 2024, CAE introduced that its longtime president and CEO Marc Parent would resign from his submit on the firm’s subsequent annual assembly in August 2025 as part of CAE’s ongoing succession plan.
This is the place issues get very attention-grabbing for an activist investor: a market chief in a secularly rising business the place the activist may probably be within the room to call the following CEO. And that is the kind of shareholder activism that Browning West focuses on: management adjustments. Accordingly, Browning West LP despatched an open letter to the board of CAE. In a succinct letter, the agency speaks extremely of CAE’s sturdy market place, factors out the corporate’s current extended interval of underperformance, however affirmed its conviction in CAE’s potential to develop earnings per share and free money stream per share properly exceeding present market expectations. However, Browning West has requested that the board have interaction with it concerning the recruitment of CAE’s subsequent CEO, believing that the board should keep away from a hasty CEO search course of and as an alternative work to recruit a confirmed CEO with a verifiable monitor file of worth creation. Browning West and its principals have an admirable historical past of helping in CEO succession at its portfolio firms. In May 2024, Browning West reconstituted the entire board of Gildan Activewear over the board’s choice to take away that firm’s long-time CEO and co-founder Glenn Chamandy. Since the reinstatement of Chamandy as CEO about eight months in the past, Gildan’s shares have appreciated practically 30%. In addition, Browning West co-founder and CIO Usman Nabi, gained in depth expertise from his time at H Partners conducting CEO searches. Between H Partners and Browning West, he has served on and/or led nomination and CEO search committees at each Tempur Sealy and Six Flags. H Partners generated a return of 242% over the course of its 13D at Tempur Sealy versus 99% for the Russell 2000 and a return of 399% over the course of its stay 13D at Six Flags versus 285.71% for the Russell 2000.
Given that Browning West even needed to difficulty this public letter, we will infer that maybe CAE’s board has not been overly receptive or made itself profoundly accessible for inbound communication requests from Browning West to take part within the search course of. Browning West doesn’t steadily get confrontational, however when it does, it is excellent at doing so. The agency picks battles that it could win. In early 2024, Browning West requisitioned a particular assembly at Gildan Activewear which resulted within the resignation of that firm’s complete board and the appointment of their eight-member slate (which included Browning West co-founder Peter Lee). Previously, at H Partners, Usman Nabi was capable of reconstitute the board at Tempur Sealy and substitute the CEO with nothing greater than a withhold vote marketing campaign, an unprecedented transfer in activism on the time. Browning West has additionally engaged with firms the place the agency was invited on to the board corresponding to Six Flags and Domino’s. We would advise CAE’s board to have a look at this as a chance versus an assault. If the board decides to combat, it may ignore Browning West whereas commencing and consummating its CEO succession plan with none enter from the activist investor earlier than the corporate’s director nomination window opens subsequent summer season. But CAE’s board could be doing that at its personal peril. Browning West is a long-term investor that doesn’t opportunistically search for activism however finds a handful of firms it needs to personal for the long run, and the agency will do no matter is important to make sure that its capital is within the fingers of the correct stewards. CAE has a selection: It can embrace Browning West and the agency’s expertise in CEO succession like different firms efficiently have. Alternatively, the corporate can combat the investor, as different firms have completed so unsuccessfully, and probably face Gildan half deux.
Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.
