Spar Aerospace's Uncertain Future
David Masotti was in a buoyant mood as he addressed employees and guests at a Spar Aerospace research and development facility in Brampton, Ont., one day last June. Masotti, president of Spar's space robotics division, was speaking at a gathering to celebrate the 50th mission of the Canadarm aboard the U.S. space shuttles. Since its inaugural flight in November, 1981, the 15-m long, 40-cm thick remote manipulator arm has placed satellites in orbit, helped repair the Hubble space telescope and performed many other tasks. Along the way, it became a cherished national symbol of Canadian scientific expertise. "Canadarm," Masotti enthused, "helped prove that we have the brains, the creativity and the wherewithal to develop advanced technology that is recognized around the world." And, said the president: "I cannot tell you what a thrill it is for all of us at Spar to host this celebration." Less than a year later, Canadarm is no longer part of the Spar family, and the company is in danger of being shut down by disgruntled investors.
Plainly, other Spar executives were less excited than Masotti about Canadarm's contribution to the company. Last month, Spar sold the space robotics group that developed it and a more versatile successor, which will be used in the construction of the International Space Station now getting under way. The purchaser was Richmond, B.C.-based MacDonald, Dettwiler and Associates, for $63 million. The transaction was part of a larger sell-off of high-tech assets aimed at enhancing profits and boosting Spar's share prices. That left the company with just one business - its profitable aircraft maintenance and repair division. The strategy, says Spar executives, had investors' interests in mind. "Spar has had an illustrious track record technologically," says president Colin Watson, appointed three years ago to lead a new executive team. "But from an investor standpoint, it's been profoundly disappointing."
Whatever Spar's intentions, the principal investors remain seriously disappointed. Spar, in fact, is facing a shareholder revolt which could, according to some observers, lead to the dissolution of the company. A group of unhappy investors who hold 58 per cent of Spar stock - which closed last week near its 52-week high of $12 but well below the $21.50 level it attained as recently as 1995 - intends to replace seven of nine directors at a shareholders' meeting in Toronto on May 13. They will also attempt to have almost $140 million accumulated through the sale of assets distributed to shareholders as a dividend - a move that at best would derail management's strategy to grow through the acquisition of other aviation maintenance firms, and at worst could shut down Spar entirely. "I just don't think the company will continue," says John Drolet, an analyst with Toronto-based Yorkton Securities. "They could sell the remaining business and Spar would end up a shell company with cash. The shareholders could distribute all the money, wind it down and say, 'Adios.' "
Members of the investors' group, who are believed to have acquired their Spar holdings independently before deciding to act jointly, are not disclosing their intentions. A New York City investment company, Crescendo Partners LP, is the largest single investor, with a 19-per-cent stake. Halifax-based IMP Group Ltd. is next with 16 per cent, C. A. Delaney Capital Management Ltd. of Toronto has about 12 per cent, and another Toronto company, Enterprise Capital Management Inc., holds just under 10 per cent. Their complaints about Spar management predate the sale of the space robotics division and appear to be rooted in a frustration at not being able to get information from the company. "A group of shareholders wanted to find out in which direction management wanted to take the company," says IMP vice-chairman James Radford, "and they were not forthcoming. This is about governance."
IMP is the only member of the shareholders' group which is seen as a potential candidate to take over Spar's aviation services business if the other investors decide to sell it off and wind up the firm. IMP is an operating company with approximately 3,000 employees and four divisions, one of them being aircraft maintenance and repair. Founded in 1967 by British-born entrepreneur Kenneth Rowe, the Halifax firm began buying and resuscitating money-losing or bankrupt Atlantic Canadian companies and now has operations in seven provinces, the United States, England and Russia. Its holdings include a share in a Moscow hotel, an airplane parts factory in Amherst, N.S., and an operation which repairs and refits Canada's Sea King helicopters and turboprop Aurora surveillance planes. IMP's willingness to take a tough line was apparent last year when it arranged to have a Russian Aeroflot jetliner seized at Montreal's Dorval Airport to back its demands for payments from the airline related to a hotel joint venture in Moscow.
The other members of the dissident Spar investors' group, Crescendo, Delaney and Enterprise, merely buy up stakes in publicly traded companies and sometimes take seats on boards of directors in order to set policy and maximize returns. They do not, as a rule, attempt to manage or operate these firms. "We principally look for companies that we can invest in and help them grow over a long period of time," says Enterprise chairman James MacDonald, who joined the Spar board last November.
Several observers say Spar became vulnerable to such market players when its share prices languished in the $7 to $11 range throughout 1998 even as management sold off divisions of the company and accumulated cash in the corporate treasury. In June, 1998, Spar shed its software engineering business, PRIOR Data Sciences, which specializes in air traffic control and defence work, to a group of managers for $15 million. Then, last October, the company completed the sale of San Diego-based ComStream Corp., which it had acquired in 1992 for $58 million. The money-losing ComStream, which designs components used in satellite and broadcast communications, was broken up and sold to three buyers for $93 million.
Next to go was a wholly owned subsidiary, Astro Aerospace Corp. of Carpinteria, Calif., which was part of Spar's space systems division. Among other things, Astro designed and manufactured the ramps used by the unmanned Sojourner vehicle to descend from a NASA spacecraft to the surface of Mars during the 1997 Pathfinder mission. The space and electronics group of Cleveland-based TRW Inc. acquired Astro in January for a total of $30.6 million cash. Also in January, Spar sold its satellite products business, located in the Montreal suburb of Ste-Anne-de-Bellevue, Que., to Electromagnetic Sciences Inc. of Norcross, Ga., for $29.5 million.
Finally, in late March, Spar announced the sale of its high-profile space robotics division, which has built five Canadarms for NASA's shuttle program since 1981. When the deal closes later this month, the division's 450 employees at its Brampton facility will join the staff of MacDonald Dettwiler, which has a workforce of about 1,000 people in several cities across Canada and has supplied software services to Spar's robotics division over the past decade. Although MacDonald Dettwiler is U.S.-owned, the division will stay in Brampton. "We're going to keep the people working on their current projects," says company president Daniel Friedmann. "We're going to try to book more business and grow the division. It's the jewel of the Canadian high-tech industry."
The space robotics group pulled in revenues of $128 million in 1998 and earned almost $17 million profit before taxes. It performs routine maintenance and technical upgrades on the existing Canadarms, but most of its revenue comes from federal contracts to develop new products. The group is currently working on several components for the 16-nation International Space Station, including a longer, more advanced version of the Canadarm and a two-armed robot capable of performing tasks currently handled by astronauts on spacewalks. As well, the group is completing work on three robotically animated dinosaurs that will become an attraction at a Florida theme park.
As for Spar Aerospace, its future is on hold until the annual meeting. Watson and his management team had chosen to develop the company's lucrative aircraft maintenance and repair business. With the acquisition of Toronto-based CAE Inc.'s aviation services subsidiary, Spar's revenues from that sector jumped to $123 million in 1998 from $53 million the previous year, and profits almost doubled to reach $14.4 million. "This has always been the profitable part of the business," says Watson, "but it was overshadowed by the flashier high-tech stuff which was financially spotty, to be charitable." Spar may be on a profitable path, but the incoming board could still opt to distribute the cash and wind up a company that has long been synonymous with high-tech achievement in Canada.
Maclean's April 12, 1999