A flight engineer performs a test 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 provides simulation training and critical operations support solutions in Canada, the United States, the United Kingdom, Europe, Asia, the Oceania, Africa and the rest of the Americas. It operates through two segments: Civil Aviation, and Defense and Security. The Civil Aviation segment offers training solutions for flight, cabin, maintenance and ground personnel in commercial, business and helicopter aviation. It also provides a range of flight simulation training devices and ab initio pilot training and crew sourcing services, as well as aircraft flight operations solutions. The Defense and Security segment operates as a training and simulation provider that delivers platform-independent solutions to enable and enhance force readiness and security for defense forces, original equipment manufacturers (OEMs), government agencies and public safety organizations.
Stock Market Value: $7.56B ($23.73 per share)
CAE shares over the past 12 months
Activist: Browning West LP
Ownership: 4.3%
Average Cost: n/a
Activist Commentary: Browning West is an independent investment partnership based in Los Angeles, California and founded in 2019. The partnership employs a concentrated (five to 10 investments), long-term and fundamental approach to investing. It focuses primarily on investments in North America and Western Europe. The firm does not use activism in all of its portfolio positions, but when it does, it’s almost always focused on leadership at the board and CEO level. Browning West wants to make sure that it has confidence in the people who are making the decisions with its capital and assure that management’s interests are aligned with shareholders.
What’s happening
On Dec. 20, 2024, Browning West sent a letter calling on CAE’s board to collaborate with the firm in the recruitment process for a new CEO.
Behind the scenes
CAE Inc. is a Canadian multinational company specializing in flight training and simulation technologies. The company operates through two segments: Civil Aviation and Defense and Security. Civil Aviation provides comprehensive training solutions for personnel in commercial, business and helicopter aviation, as well as manufacturing flight simulation training devices. Defense and Security provides similar solutions, but to defense forces, government agencies and other related end markets. CAE is the market leader in both manufacturing highly valuable flight simulators and operating training facilities for flight safety. The company also sells its valuable technology to customers who conduct their own independent training of flight personnel.
CAE maintains an enviable position within an attractive and growing industry. It is the largest player in its market and at least double the size of its next largest competitor, aptly named FlightSafety International, a business which is owned by Berkshire Hathaway. Any business with Warren Buffett’s stamp of approval is certainly an indication of a favorable mix of growth and value. It is hard to think of another industry where the growth rate is so certain. Annual global flight miles typically grow in the mid-single digits and there is a tremendous long-term opportunity for growth. As flight volumes continue to grow, that means more aircraft, more pilots, more personnel, and, of course, more simulators and more training.
Still, CAE has underperformed in the past five years, delivering a return of -8.75% versus a nearly 101.78% return for the five years prior. When the company reported its FY24 results in March 2024, it missed analysts’ full-year expectations for revenue by about 5% and EPS by 4%. In addition, the company reported an operating loss of $185 million in Canadian dollars after putting up C$466 million the year prior. A hefty portion of the loss came from a C$568 million non-cash impairment of Defense and Security goodwill and C$90.3 million in unfavorable contract profit adjustments due to accelerated risk recognition on certain legacy contracts. On Nov. 12, 2024, CAE announced that its longtime president and CEO Marc Parent would resign from his post at the company’s next annual meeting in August 2025 as a part of CAE’s ongoing succession plan.
This is where things get very interesting for an activist investor: a market leader in a secularly growing industry where the activist could potentially be in the room to name the next CEO. And this is the type of shareholder activism that Browning West focuses on: leadership changes. Accordingly, Browning West LP sent an open letter to the board of CAE. In a succinct letter, the firm speaks highly of CAE’s strong market position, points out the company’s recent prolonged period of underperformance, but affirmed its conviction in CAE’s ability to grow earnings per share and free cash flow per share well exceeding current market expectations. However, Browning West has requested that the board engage with it regarding the recruitment of CAE’s next CEO, believing that the board must avoid a hasty CEO search process and instead work to recruit a proven CEO with a verifiable track record of value creation. Browning West and its principals have an admirable history of assisting in CEO succession at its portfolio companies. In May 2024, Browning West reconstituted the entire board of Gildan Activewear over the board’s decision to remove that company’s long-time CEO and co-founder Glenn Chamandy. Since the reinstatement of Chamandy as CEO about eight months ago, Gildan’s shares have appreciated nearly 30%. In addition, Browning West co-founder and CIO Usman Nabi, gained extensive experience 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 both 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 live 13D at Six Flags versus 285.71% for the Russell 2000.
Given that Browning West even had to issue this public letter, we can infer that perhaps CAE’s board has not been overly receptive or made itself profoundly available for inbound communication requests from Browning West to participate in the search process. Browning West does not frequently get confrontational, but when it does, it’s very good at doing so. The firm picks battles that it can win. In early 2024, Browning West requisitioned a special meeting at Gildan Activewear which resulted in the resignation of that company’s entire board and the appointment of their eight-member slate (which included Browning West co-founder Peter Lee). Previously, at H Partners, Usman Nabi was able to reconstitute the board at Tempur Sealy and replace the CEO with nothing more than a withhold vote campaign, an unprecedented move in activism at the time. Browning West has also engaged with companies where the firm was invited on to the board such as Six Flags and Domino’s. We would advise CAE’s board to look at this as an opportunity as opposed to an attack. If the board decides to fight, it could ignore Browning West while commencing and consummating its CEO succession plan without any input from the activist investor before the company’s director nomination window opens next summer. But CAE’s board would be doing that at its own peril. Browning West is a long-term investor that does not opportunistically look for activism but finds a handful of companies it wants to own for the long term, and the firm will do whatever is necessary to ensure that its capital is in the hands of the right stewards. CAE has a choice: It can embrace Browning West and the firm’s experience in CEO succession like other companies successfully have. Alternatively, the company can fight the investor, as other companies have done so unsuccessfully, and potentially face Gildan part deux.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.
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