A flight engineer performs a take a look at flight in a CAE Inc. 7000 Collection Boeing Co. 737-800 flight simulator at a CAE facility in Montreal, Quebec, Canada, on Tuesday, Aug. 13, 2019.
Christinne Muschi | Bloomberg | Getty Pictures
Firm: CAE Inc (CAE)
Enterprise: CAE gives simulation coaching and important operations assist options in Canada, the USA, the UK, Europe, Asia, the Oceania, Africa and the remainder of the Americas. It operates by two segments: Civil Aviation, and Protection and Safety. The Civil Aviation section gives coaching options for flight, cabin, upkeep and floor personnel in business, enterprise and helicopter aviation. It additionally gives a spread of flight simulation coaching units and ab initio pilot coaching and crew sourcing providers, in addition to plane flight operations options. The Protection and Safety section operates as a coaching and simulation supplier that delivers platform-independent options to allow and improve drive readiness and safety for protection forces, authentic gear producers (OEMs), authorities businesses and public security organizations.
Inventory Market Worth: $7.56B ($23.73 per share)
CAE shares over the previous 12 months
Activist: Browning West LP
Possession: 4.3%
Common Price: n/a
Activist Commentary: Browning West is an unbiased funding partnership based mostly in Los Angeles, California and based in 2019. The partnership employs a concentrated (5 to 10 investments), long-term and elementary 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 virtually at all times centered on management on the board and CEO degree. Browning West desires to be sure 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 despatched 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 corporate operates by two segments: Civil Aviation and Protection and Safety. Civil Aviation gives complete coaching options for personnel in business, enterprise and helicopter aviation, in addition to manufacturing flight simulation coaching units. Protection and Safety gives 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 corporate additionally sells its worthwhile expertise to clients who conduct their very own unbiased coaching of flight personnel.
CAE maintains an enviable place inside a beautiful and rising business. It’s the largest participant in its market and no less than double the scale of its subsequent largest competitor, aptly named FlightSafety Worldwide, 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 progress and worth. It’s exhausting to think about one other business the place the expansion price is so sure. Annual world flight miles usually develop within the mid-single digits and there’s a super long-term alternative for progress. As flight volumes proceed to develop, meaning extra plane, extra pilots, extra personnel, and, in fact, extra simulators and extra coaching.
Nonetheless, 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 ends in March 2024, it missed analysts’ full-year expectations for income by about 5% and EPS by 4%. As well as, the corporate reported an working lack of $185 million in Canadian {dollars} after placing up C$466 million the yr prior. A hefty portion of the loss got here from a C$568 million non-cash impairment of Protection and Safety goodwill and C$90.3 million in unfavorable contract revenue changes as a result of accelerated danger recognition on sure legacy contracts. On Nov. 12, 2024, CAE introduced that its longtime president and CEO Marc Mother or father would resign from his put up on the firm’s subsequent annual assembly in August 2025 as part of CAE’s ongoing succession plan.
That is the place issues get very fascinating for an activist investor: a market chief in a secularly rising business the place the activist might doubtlessly be within the room to call the subsequent 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 robust market place, factors out the corporate’s latest extended interval of underperformance, however affirmed its conviction in CAE’s means to develop earnings per share and free money stream per share effectively exceeding present market expectations. Nonetheless, Browning West has requested that the board interact with it relating to 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 aiding in CEO succession at its portfolio firms. In Might 2024, Browning West reconstituted the complete board of Gildan Activewear over the board’s determination to take away that firm’s long-time CEO and co-founder Glenn Chamandy. For the reason that reinstatement of Chamandy as CEO about eight months in the past, Gildan’s shares have appreciated practically 30%. As well as, Browning West co-founder and CIO Usman Nabi, gained intensive expertise from his time at H Companions conducting CEO searches. Between H Companions and Browning West, he has served on and/or led nomination and CEO search committees at each Tempur Sealy and Six Flags. H Companions 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 dwell 13D at Six Flags versus 285.71% for the Russell 2000.
Provided that Browning West even needed to concern this public letter, we are able to infer that maybe CAE’s board has not been overly receptive or made itself profoundly out there for inbound communication requests from Browning West to take part within the search course of. Browning West doesn’t ceaselessly get confrontational, however when it does, it is superb at doing so. The agency picks battles that it may well 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). Beforehand, at H Companions, Usman Nabi was capable of reconstitute the board at Tempur Sealy and exchange 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 might advise CAE’s board to take a look at this as a possibility versus an assault. If the board decides to combat, it might 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 time. However 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 desires to personal for the long run, and the agency will do no matter is critical to make sure that its capital is within the arms of the fitting stewards. CAE has a selection: It could 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 accomplished so unsuccessfully, and doubtlessly 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.
