Investment Committee Paper Agenda
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NOVA SCHOOL OF BUSINESS AND ECONOMICS Master in Finance / Management PRIVATE EQUITY CHALLENGE Professors: Luís Mota Duarte Fábio Santos Carolina Lopes Mathieu Bourque Pedro Pinto Coelho Pedro Mendes 30394 / 4108 29792 / 3980 20220 / 3898 20740 / 3737 INVESTMENT COMMITTEE PAPER AGENDA 4 Executive Summary 31 Business Plan & Forecasts Business Plan Revenues 5 Company Overview Operating Income CAE Profile Cashflow Business Model Competitive Positioning 36 Capital Structure Valuation 10 Market Overview Leverage Market Overview Simulation & Training Overview Sources and Uses Civil Aviation Market LBO Returns Defence & Security Market Healthcare Market Competitive Landscape 41 Exit & Due Diligence Exit Overview Trade Sale 16 Historical Financial Analysis Initial Public Offering Income Statement Due Diligence Balance Sheet Cashflow 46 Appendix 21 Investment Thesis Deal Rationale and Strategy Value creation PE CHALLENGE | CAE, INC. 3 INVESTMENT COMMITTEE PAPER EXECUTIVE SUMMARY ENTRY VALUE CREATION EXIT ▪ CAE Inc. is a simulation and training company that operates CAE’s value creation plan consists of a Buy & Build strategy ▪ The most suitable exit strategy is a carve-out of the across three segments – Civil Aviation, Defence & Security allied with portfolio expansion and operational improvements Healthcare branch while pursuing a sale of the other two and Healthcare segments to a strategic partner ▪ Based in Canada, CAE currently has operations worldwide in ▪ With tremendous demand for pilots from airlines over the ▪ The HC segment is most likely to list in the Nasdaq stock over 35 countries and has been a consistent dominant next couple of decades, supply is expected to follow such exchange. Civil aviation and Defence & Security can be player in its industry (with 51% and 19% market share in trend. CAE has the potential and expertise to further tap bought out by a major competitor, as is the case of L3 simulator market for Civil and Defence, respectively, thus into the ab initio training of aspiring pilots to seize the Technologies taking the #1 spot, and 9% in the Healthcare). Its strong expected growth in this sub-industry. Considering this trend ▪ By splitting the company, the exit is eased, given the large competitive moat, network of training centres and broad is especially noteworthy in North America and APAC region, expected size of CAE at exit and lack of competitors client base, alongside a diversified offer of unique, the company can exploit strategic aquisitions in the regions operating simultaneously across the three segments innovative and integrated products and services have to grab onto and improve on existing infrastructure of flight ▪ Furthermore, exiting by parts can potentiate multiple allowed it to seize market share over the years schools arbitrage by eliminating a potential conglomerate discount ▪ The company has shown outstanding historical financials, ▪ Moreover, as CAE becomes a training superpower of aspiring as the Healthcare peers display higher valuation multiples with above-market sustainable growth in already fast- pilots, it increases its attractiveness towards the pilot-hungry ▪ Given uncertainty over the exit strategy, a dual-track process growing industries, an increasing contribution of recurring airlines which, in turn, will lead to more contracts for CAE’s will be put in place to evaluate the optimal strategy revenue and consistent cashflow generation which, aligned other services ▪ After an optimal investment period of 5 years, the company with its strong asset base results in a leverageable balance ▪ The healthcare S&T market is expected to grow is conservatively expected to sell at a flat multiple, yielding a sheet tremendously over the next years – 14.5% CAGR –, and CAE 3.22x return for the fund and 21.2x for the management. ▪ Overall, CAE presents an opportunity to create value, taking is well-positioned to enjoy this growth. By diversifying and The institutional investor will earn C$ 11.8b, accounting for advantage of CAE’s positioning, favourable macroeconomic optimizing its product portfolio, the company will become the ordinary shares and the FRI, thus enjoying an IRR of conditions and identification of untapped opportunities an increasingly attrative supplier of medical simulation 26.4% ▪ Based on an analysis performed on trading comparables and equipment. By investing through both R&D and targeted ▪ If the exit multiple is 0.5x higher, accounting for benefit of precedent transactions, as well as a standalone valuation, acquisitions, CAE can tap into attractive opportunities in carving out Healthcare, the investments yield a 27.6% IRR in CAE should be priced at an EV/EBITDA around 10.3x, orthopedic, ophthalmological and surgical devices segments the same 5 years corresponding to an EV of C$ 7.1b ▪ Finally, the company is well-positioned to improve its ▪ The deal will be funded in 5.5x by debt and the remaining by operations, namely its worsening cash conversion cycle and equity. The former will be comprised exclusively of senior the increase in the utilization rate of its simulators as it debt with 3 tranches issued in USD, EUR and GDP, in rapport integrates centres across the business lines to revenue composition ▪ The proposed financing structure incentivizes management by granting them a 9% stake of ordinary shares in return of C$ 29.8m PE CHALLENGE | CAE, INC. 4 CAE, INC. COMPANY OVERVIEW COMPANY PROFILE PRODUCT MIX BUSINESS MODEL COMPETITIVE POSITIONING COMPANY OVERVIEW | CAE PROFILE From humble beginnings, CAE is now the training partner of choice for numerous companies and agencies COMPANY PROFILE Macroeconomics New business boost the need CAE becomes model across all CAE begins for virtual the dominant ▪ CAE Inc. is a manufacturer and supplier of simulation equipment and training services segments ▪ Formerly known as Canadian Aviation Electronics, CAE – based in St-Laurent, Canada – has operations training player consistently innovated and secured a record number of industry firsts which helped propel the company as a market leader in Simulation & Training 1950s 1960s 1970s 1980s 1990s 2000s 2010s ▪ By combining innovative technological tools with legacy training solutions, CAE give itself the mission to: Enter the Rapid Enter Healthcare simulators international Pivoting away business expansion from products to services Make flying safer Improve forces’ Increase patients’ readiness well-being CONQUERING THE WORLD, ONE REGION AT A TIME ▪ As a pure-play training company, CAE offers great characteristics: High level of recurring Strong position to take revenue (60%) market share Culture based on Compelling competitive innovation moat Corporate HQ ▪ The company has always been at the forefront of technology advancement. In the age of big Civil Aviation data, augmented reality and super computers, CAE is well-positioned to maintain its spot as D&S the market leader – CAE is the trainer by excellence Healthcare PE CHALLENGE | CAE, INC. 6 COMPANY OVERVIEW | PRODUCT MIX Teachers, leave the disruption alone! ▪ CAE produces the most innovative full-flight simulators (FFS) and flight training devices (FTD) . ▪ Follow-on includes product upgrades – in the form of software, visual systems, and customizations – and provision of spare parts – to modify or fix the FFS PRODUCTS Products and services sold in ▪ CAE’s training centres provide for commercial and business pilots the Type Rating training, the Multi- Crew Cooperation (MCC) course, among others. Also, provide maintenance and cabin crew training a package ▪ Services provided follow the full life-cycle of a pilot/staff – continuous training from sourcing until CIVIL AVIATION CIVIL SERVICES retirement continuous training. CAE also provides aviation personnel recruitment ▪ CAE’s flight schools include the ATPL and MPL courses for ab initio training (cadets) ▪ Comprehensive portfolio across air, naval and land as well as public safety segments ▪ These products range from desktop trainers to the highest fidelity full-mission simulators Access to PRODUCTS confidential biddings D&S ▪ Move to Training Systems Integrator (TSI), merging live, virtual and constructive solutions – a big broadens CAE’s spectrum of services ranging from aeromedical evacuation training systems to fuselage trainers product mix ▪ TSI facilitates training operations between the various military forces and eases cooperation with SERVICES allied forces ▪ CAE’s portfolio includes patient manikins and simulators, ultrasound and surgical simulators, and Tremendous a powerful simulation center management solution platform growth PRODUCTS opportunity, ▪ CAE’s Turnkey offering delivers bundled solutions – including soft/hardware platforms, especially high accreditation support, professional services, and others – that advance healthcare education and fidelity patient safety goals HEALTHCARE products and ▪ Big focus on nursing and emergency technician training SERVICES AR ▪ Continuous training services to physicians (mandatory) in collaboration with medical associations More detailed information in Appendix I,II,III,IV PE CHALLENGE | CAE, INC. 7 BUSINESS MODEL | LEGACY VS NEW Pivoting away from its legacy business model, CAE is accelerating the trend of training outsourcing CIVIL AVIATION DEFENCE & SECURITY HEALTHCARE ▪ CAE sells/leases FFS and related products ▪ Mostly product oriented ▪ No legacy business model LEGACY ▪ Includes maintenance services and training for ▪ CAE sells/leases simulators to militaries ▪ Industry in early stage with CAE actively trying to develop