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A flight engineer conducts a test flight in a CAE Inc. 7000 Series Boeing 737-800 simulator at a CAE facility in Montreal, Quebec, Canada, on Tuesday, August 13, 2019.
Christinne Muschi | Bloomberg | Getty Images
Company Overview: CAE Inc (CAE)
Business Description: CAE offers simulation training and critical operational support solutions across Canada, the U.S., the U.K., Europe, Asia, Oceania, Africa, and the Americas. The company operates in two segments: Civil Aviation and Defense and Security. The Civil Aviation division delivers training solutions for flight, cabin, maintenance, and ground staff in commercial, business, and helicopter aviation, including flight simulation training devices, ab initio pilot training, and crew sourcing services. The Defense and Security division operates as a simulation and training provider offering platform-agnostic solutions to enhance force readiness and safety for defense forces, original equipment manufacturers (OEMs), government entities, and public safety organizations.
Market Capitalization: $7.56 billion ($23.73 per share)
CAE shares performance over the last 12 months.
Activist Investor: Browning West LP
Ownership Stake: 4.3%
Cost Basis: n/a
Activist Insights: Browning West is an independent investment partnership established in 2019 and based in Los Angeles, California. The partnership employs a concentrated investment strategy (typically five to ten holdings) with a long-term, fundamental investing approach, mainly targeting North America and Western Europe. Although not every investment involves activist tactics, when they do, it usually pertains to influencing leadership at the board and CEO levels. Browning West seeks to ensure that decision-makers align their interests with those of shareholders.
Current Situation
On December 20, 2024, Browning West issued a letter urging CAE’s board to partner with them during the search for a new CEO.
Background Information
CAE Inc. is a Canadian multinational focused on flight training and simulation technologies, operating through Civil Aviation and Defense and Security segments. The Civil Aviation division offers extensive training solutions for various aviation personnel while manufacturing simulators. The Defense and Security segment provides similar services for defense forces and governmental agencies. As the leading manufacturer of flight simulators and operator of flight safety training facilities, CAE boasts a significant market presence and sells its technologies to clients conducting independent training.
CAE holds a dominant position in a growing sector, outstripping its nearest competitor, FlightSafety International (owned by Berkshire Hathaway), by at least double. The consistent growth rates in global flight operations present promising prospects for expansion in terms of aircraft, pilots, and training needs. However, CAE has underperformed over the past five years, reporting a return of -8.75% against a 101.78% return in the previous five years. In March 2024, the company reported FY24 results, missing revenue targets by about 5% and EPS forecasts by 4%. They also faced a $185 million operating loss due to a $568 million non-cash impairment related to Defense and Security goodwill and other unfavorable contract adjustments. Additionally, on November 12, 2024, CAE announced the resignation of Marc Parent, the longtime president and CEO, scheduled for the next annual meeting in August 2025 as part of a succession plan.
This scenario presents a compelling opportunity for an activist investor: a leading firm in a consistently expanding industry, where Browning West could influence the choice of the next CEO. This aligns with Browning West’s focus on leadership alterations. Thus, Browning West sent a public letter to CAE’s board, commending CAE’s market position while highlighting its current underperformance. They expressed confidence that CAE could surpass market expectations for earnings and free cash flow. However, they emphasized the need for the board to engage with them in the CEO search to ensure a well-timed and effective recruitment process for a proven leader capable of creating value. Browning West has a successful history of facilitating CEO transitions, having restructured the board of Gildan Activewear significantly in recent months. The firm also possesses expert knowledge in CEO searches, particularly from Usman Nabi’s experiences at H Partners.
Given the need for Browning West to publicly issue this letter, it suggests CAE’s board might not have been responsive to their outreach regarding participation in the CEO search. Browning West usually opts for non-confrontational strategies but excels when necessary. The firm targets manageable battles. For instance, they requisitioned a special meeting at Gildan Activewear in early 2024 that led to the replacement of the entire board. In contrast, Usman Nabi’s successful involvement with H Partners allowed for a board reconstitution at Tempur Sealy through a campaign that aimed for withhold votes, marking an unprecedented milestone in activist measures.
CAEs board has a decision to make: they can either choose to view Browning West’s involvement as an opportunity for collaborative engagement or risk confrontation. If they opt for the latter route, ignoring Browning West while proceeding with their succession planning without their input may backfire. Browning West is a long-term investor committed to ensuring their capital is handled by competent management. The dilemma for CAE is clear: embrace Browning West’s expertise in CEO succession or face possible repercussions similar to those seen at Gildan.
Ken Squire is the founder and president of 13D Monitor, a service that researches shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, which invests based on activist 13D investments.
