CAE leader selection: Activist Browning West proposes collaboration.

Company: CAE Inc (CAE)

CAE offers simulation training and critical operations support solutions in various regions, including Canada, the United States, the United Kingdom, Europe, Asia, Oceania, Africa, and the rest of the Americas. The company operates through two segments: Civil Aviation and Defense and Security. The Civil Aviation segment provides training solutions for flight, cabin, maintenance, and ground personnel in commercial, business, and helicopter aviation. It also offers flight simulation training devices, ab initio pilot training and crew sourcing services, as well as aircraft flight operations solutions. On the other hand, the Defense and Security segment operates as a training and simulation provider that delivers platform-independent solutions to enhance force readiness and security for defense forces, OEMs, government agencies, and public safety organizations.

Stock Market Value: $7.56B ($23.73 per share)

Activist: Browning West LP

Ownership: 4.3%

Average Cost: n/a

Browning West is a Los Angeles-based investment partnership founded in 2019. The firm employs a focused, long-term, and fundamental approach to investing, with a concentration on North America and Western Europe. Browning West does not use activism in all of its portfolio positions but focuses on leadership changes at the board and CEO level when it does. The firm aims to ensure that it has confidence in the decision-makers and that management's interests are aligned with shareholders.

What's happening

On December 20, 2024, Browning West wrote a letter requesting CAE's board to cooperate with the company in the selection of a new CEO through joint recruitment efforts.

Behind the scenes

CAE Inc. is a Canadian multinational corporation that specializes 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.

The aviation industry presents a promising opportunity for growth, with annual global flight miles increasing in the mid-single digits. As flight volumes continue to rise, there is a need for more aircraft, pilots, personnel, simulators, and training. CAE, the largest player in its market, is well-positioned to capitalize on this growth, with Warren Buffett's endorsement attesting to its favorable mix of growth and value.

Despite underperforming in the past five years, CAE delivered a return of -8.75% compared to a nearly 101.78% return in the five years prior. In March 2024, the company missed analysts' full-year revenue expectations by about 5% and EPS by 4%. The company also reported an operating loss of $185 million in Canadian dollars after putting up C$466 million the year prior. The loss was due to 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. 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 part of CAE's ongoing succession plan.

Browning West LP, a shareholder activist firm, has sent an open letter to the board of CAE, expressing its conviction in the company's ability to grow earnings per share and free cash flow per share well beyond current market expectations. However, the firm has also 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 has a history of assisting in CEO succession at its portfolio companies, including reconstituting the entire board of Gildan Activewear and co-founder and CIO Usman Nabi's extensive experience in CEO searches.

Browning West has had a history of engaging with companies and participating in CEO succession processes. However, it appears that CAE's board has not been receptive to inbound communication requests from Browning West, leading to the need for a public letter. Browning West is a long-term investor that does not seek out activism but finds a few companies it wants to own for the long term. 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 have, or it can fight the investor, as other companies have done so unsuccessfully, and potentially face Gildan part deux.

Ken Squire is both 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.