AIM.TO - Aimia

[Cigarbutt]

honest question wabuff - are you a former Aimia employee who got blown out when Mittlemans took over?

it is clear your knowledge level is high, it is clear your economic interest is low, and it is clear that for some reason you really do not like the Mittlemans.

What else would explain this fact pattern?

His "name" is not wabuff or wabuffalo, it is wabuffo and it's not the messenger that you should be attacking.

Downside-type comments should be welcome, especially if fact-based. And with Aimia, there's that smell.

[wabuffo]

Nah.  Just a security-analysis free spirit, man.

 

I don't know why but AIMIA is my new favorite toy, it just is.  Maybe because of all the layers to it - it's just so interesting.  Of course, I'm not investing in it because I think the returns will be ho-hum.  I could be wrong about that, of course.  I guess my attempt at humor doesn't hit the mark. 

 

wabuffo

[Homestead31]

 

His "name" is not wabuff or wabuffalo, it is wabuffo and it's not the messenger that you should be attacking.

Downside-type comments should be welcome, especially if fact-based. And with Aimia, there's that smell.

 

There has been no attack here. In fact, the opposite is true as I have complimented "wabuff's" (hope you are not offended by the shortening, CB) work on multiple occasions.  I just find it curious that he puts in all the effort that he does when he seemingly does not have an economic interest in the outcome.

 

Downside type comments are definitely welcome, and I applaud them when they are presented in an unbiased way.

[bizaro86]

Speaking for myself, I wish I had access to a disgruntled former high level employee for all of my investments. That seems way more useful than talking to management.

 

I also wish I had access to wabuffo level due diligence on all my investments. The deep dives here and on Vulcan have been very illuminating. I don't own either firm but I'm a better investor for having read that work.

 

There weren't any personal attacks, imo.

[Cigarbutt]

Another look at Virgin Airlines and its Velocity loyalty unit with past, present and future implications

 

-Rear-view mirror assessment

Loyalty units have unique attributes but airlines evolve in a poor industry with some economic fundamentals that improved in the years leading to 2020 but with a constant vulnerability to external shocks as the Covid episode clearly revealed in its path. IMO and as i've described here and as i've explained in various communications to various Boards before, there was a window of opportunity to reasonably and timely monetize PLM before Covid came. With Velocity, the PE-firm Affinity Equity Partners bought a 35% stake in 2014 and sold for 700M in the fall of 2019 (price=twice initial outlay and overall, with interim dividends, a 3,6X return on the initial outlay). While one cannot reasonably expect such unusual skill and luck (contract negotiations, timing etc), it's hard to get excited (and not critical) when Affinity ended up with a large pool of money to opportunistically reinvest while the PLM stake is now in the middle of a tight cross-border reorganization process involving a leveraged airline with its home for domestic and international routes in Mexico, a country with very little political appetite to help and during an unprecedented external shock that happens to be most severe in Mexico also. An interesting feature apart from the above and which is discussed below was that the minority holder was able to extract value along the way independently from the loyalty unit's inter-company loan to the parent.

No wonder some people can "retire" early:

https://www.afr.com/rear-window/affinity-equity-partners-lucky-escapes-20200318-p54bff

 

-Present

i watched the reorg webinars that wabuffo referred to and there are many resources now available on the web (various presentations dealing with various aspects) dealing with airline reorganizations, suggesting that very favorable risk-reward investments would include the law firms involved.. For an industry classically mired in looming excess capacity, the fall in demand is being defined and it's now possible to assess the range of outcomes for 'recovery' and long-lasting effects. The following were helpful (numbers and concepts)

https://docs.google.com/viewerng/viewer?url=https://www.airlines.org/wp-content/uploads/2020/03/A4A-COVID-Impact-Updates-36.pdf&hl=en&utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosmarkets&stream=business

https://americanconsequences.com/the-death-of-airlines/

It looks like load factors of more than 60-70% will be necessary to reach break-even for companies like Aeromexico. Bain Capital has been deemed the leading finance resource in the Virgin reorg and recent developments suggest a very poor recovery for unsecured creditors and likely (given valuation, recovery along the priority pecking order etc) a much smaller footprint going forward (with very clear implications for symbiotic loyalty units).

https://www.bloomberg.com/news/articles/2020-08-24/virgin-australia-creditors-to-lose-almost-everything-under-bain?srnd=markets-vp

It looks also that Aeromexico did not become insolvent before filing but many legal experts and analysts suggest that it filed "late". The zone of insolvency concept does not apply literally in bankruptcy courts, including the NY Southern District but it's a useful concept if your line of defense is that the June 30 filing was a surprise.

 

-Possibilities for the future

There are signs of life in the airline industry but the recovery in my opinion is highly uncertain and i would submit that it's too early to suggest that Mr. Buffett lost it with his timing on exit. Apologies for the following but this is submitted to balance the pink-colored scenarios with short-term attachment points being described and because the recent Virgin developments before Bain help to understand the potential dynamics that have played before filing and that may play out going forward. Before the reorg plan got going, liquidation was considered and the 100%-owned Velocity unit, which is outside of the bankruptcy process, got in line as a creditor to the estate (!). How is that possible? In 2014, Virgin secured a loan (150M, now around 200M with capitalized interest) from Velocity (100%-owned then). The way Velocity is set up, there are trustees overlooking the funds targeted for the consumer members, holders of the loyalty currency. There is no detailed disclosure, this issue has become less critical given the active Bain reorg process and it's been said that trust funds would apparently cover the redemption liability but an amount around 200M (loan mentioned above and another 10M from pre-bought seats for members) sent upstream to Virgin is in limbo and, because of conflicting priorities, Velocity has made moves in order to collect money owed to itself, sort of. This points to the complexity of the process for loyalty subs, especially if the ownership is mixed and this may raise interesting questions for the floor value of PLM, if a liquidation process needs to be completed down the line.

 

---

In a way, the minority-interest in PLM negotiated deals equivalent to DIP financing but before filing occurred. i'm just a noob but i find this odd. All in all, the complicated and symbiotic relationship means that the gains and the pain will be shared. Going forward, given the "foreign" filing for chapter 11, which favors the debtor and which emphasizes business judgement standards and estate protection, it appears that Aeromexico and the DIP people have done relatively well, at least so far. Operating within the vicinity or in actual insolvency often involves navigating between playing one's hand versus playing into someone's hand. This is indeed a very interesting situation.

[samwise]

It appears that the Mittleman fund made a new major purchase in Q2, 2020.

 

Gaze in wonder, AIMIA shareholders!  I give you... Cineplex (CGX.TO)!

 

wabuffo

 

Thanks for the update. Did they buy this for AIMIA as well?

 

I guess it’s in line with ownership in AMC, which they already had.

[wabuffo]

i watched the reorg webinars that wabuffo referred to and there are many resources now available on the web (various presentations dealing with various aspects) dealing with airline reorganizations, suggesting that very favorable risk-reward investments would include the law firms involved..

 

This is my go-to source now for following the LatAm airline bankruptcies.  Reorg also has weekly podcasts in addition to their webinars.  Their latest (Aug 23) covers a wide range of LatAm restructurings but does a very quick skip-thru of the airline bankruptcies (Aeromexico, Avianca). 

 

https://soundcloud.com/user-627041409/latam-deep-dive-featuring-telecom-argentina-atento-airlines-aug-23-2020

 

One option that AIMIA shareholders must brace for apparently is that AIMIA may be asked (coerced?) into exchanging some/all of its PLM equity for an equivalent stake in the DIP loan.  This hasn't come up in the Aeromexico case, but the Avianca case is very instructive.  Avianca is also pursuing a two-stage DIP loan.  But this quote from the reorg podcast got my attention (~approx. 25min20sec mark).

"$168.5m USD of Tranche A will be issued to Advent (Capital) for its 20% stake in rewards program LifeMiles.  Consideration for Advent's stake also includes $26.5m of cash."

 

Advent Capital is the owner of 30% of the equity in Avianca's LifeMiles rewards program so presumably they retain a 10% stake after this transaction.  LifeMiles is a bigger program than PLM with more members (9.7m vs 7.5m for PLM) and more EBITDA (2019 = $142.3m USD for LifeMiles vs $95.5m USD for PLM).  Advent paid $344m for a 30% stake in LifeMiles in July 2015.  Keep in mind that LifeMiles has done $450m of debt-financed dividend recapitalization - so Advent has likely already pulled ~$150m of distributions from LifeMiles.

 

If I get a chance today, I'll try to compare the implied enterprise value for LifeMiles from this transaction to PLM using the two airlines' 2019 earnings and current balance sheets.  I don't think its bad news for PLM - but it will be interesting if they are given a choice to liquidate their PLM stake but the catch is that they must do it through DIP financing (and a choice to convert some or all of their PLM equity into a possible equity stake in the reorganized Aeromexico).  Wouldn't that be a curve ball?

 

Every case is different - so this is not a prediction that the same thing will happen in Aeromexico's case as appears to be happening in the Avianca bankruptcy proceedings.  The Aeromexico DIP so far has only talked about lenders being asked to participate in the two DIP tranches.  We also don't have a DIP filing posted to the Avianca court docket yet - so details of their DIP are unknown (except for Reorg's sources being quoted on their webinars and podcasts).

 

wabuffo

[Dr. Aybolit]

again, great recon wabuffo.  i had actually read about that but have yet to do the work on what the imputed valuation is.  Having already leveraged up Lifemiles, Advent may have been more compelled to take a lower mark on the exchange.  But even so, I think this bodes well if Aimia / PLM / Aeromexico were to go in a similar direction, could mean a liquidity event for Aimia's stake in PLM happens much more quickly.

 

also i agree with bizarro86 about welcoming negative views, without it being personal.  cigarbutt may think Aimia smells bad and is worth $0 but I learn from his posts some things I hadn't known before, so the fact that my view on Aimia is diametrically opposed to his doesn't make me feel personally affronted for having heard his views.

 

- Dr. Aybolit

[wabuffo]

If I get a chance today, I'll try to compare the implied enterprise value for LifeMiles from this transaction to PLM using the two airlines' 2019 earnings and current balance sheets.  I don't think its bad news for PLM.

 

FWIW - here's my back-of-the-envelope math on the implied value of PLM given the recent Avianca LifeMiles-Advent DIP transaction.

 

There's two parts:

1) I used like-to-like income statements for 2019 to come up with steady-state full-year adj. EBITDA (op income + D&A) numbers for each program.  The 2020 numbers are wonky because of the refunds and virus impacts to redemptions. 

2) I took the Advent transaction and looked at LifeMiles balance sheet.  Latest debt o/s = $388.6m USD.  For cash, I assume Advent took out cash in proportion to the 20% to get the cash available ($26.5m/.2 = $132.5m.)  That gives net debt of $256m USD for LifeMiles.  I then valued the LifeMiles equity at the $168.5m for 20% = $842.5m

 

If my math and assumptions are right, then LifeMiles is being valued at a 7.7x EV/EBITDA multiple.  Using PLM's cash on the b/s at 6/30/20 based on the recent BK filing and the lack of debt and using the same 7.7x EV/EBITDA ratio, PLM's business would be valued at $737m USD (net of cash).  That values AIMIA's stake at $380m USD.

 

I'm not sure what to do about the $100m of receivables from PLM, so I just assumed that AIMIA will also draw $100m on its way out to simplify the math.  That gives the total value to AIMIA for its stake = $480.6m USD.

 

Like I said, not a terrible outcome for AIMIA if it comes to pass.  The question is would they consider a DIP option if it was offered to them voluntarily?  Its a little riskier - but its better than the 7.5x adj EBITDA and $400m USD minimum proceeds bogies in their deal with Aeromexico.

 

wabuffo

[Cigarbutt]

again, great recon wabuffo.  i had actually read about that but have yet to do the work on what the imputed valuation is.  Having already leveraged up Lifemiles, Advent may have been more compelled to take a lower mark on the exchange.  But even so, I think this bodes well if Aimia / PLM / Aeromexico were to go in a similar direction, could mean a liquidity event for Aimia's stake in PLM happens much more quickly.

also i agree with bizarro86 about welcoming negative views, without it being personal.  cigarbutt may think Aimia smells bad and is worth $0 but I learn from his posts some things I hadn't known before, so the fact that my view on Aimia is diametrically opposed to his doesn't make me feel personally affronted for having heard his views.

- Dr. Aybolit

To be clear, this is about assessment of the risk-reward profile and the "zero" comment was meant, when mentioned, as a an assessment of the risk-return profile, at that specific time.

Also, i may eventually be back into Aimia securities if personal evaluation of risk-reward profile becomes favorable.

 

For the 'smell' part, the posts here are essentially about character and competence, given that the challenges are unusually great but i don't think this is a Ponzi scheme or anything. Also, i'm not wired for single name short selling but i understand that poor incentive alignment can bring some people into purposeful short selling tactics. This is not my game but incentives do matter.

 

Apologies if some comments about the Mittleman brothers had a personal impact on you but some of the comments are simply in the same vein as wondering if you are a real retired licensed physician.

[Dr. Aybolit]

I was being sincere, not facetious, in saying no personal affront is taken in receiving negative views or any point of view that is contrary to my own.  I actually think those who seek to stifle opposing views are being counter-productive.  But I don't see what relevance my moniker here, or my profession, should have in debating the merits of the arguments made.  Wabuffo could be a senior partner at Goldman Sachs, or he could be a plumber who reads a lot, the points he makes are what I consider and debate, not his background.  The anonymity of these message boards is I think intended to foster a focus on the ideas themselves, not the status or standing of those who make them.  I can honestly say that I have never once spent a second of mental energy wondering what your true identity is.  Why would you care to know mine? 

[bizaro86]

One thing I think might make a difference to relative value of life miles and PLM is that Life Miles has been run aggressively.

 

Life miles sells miles by subscription in Columbia, and to all the major transferable credit card companies in the US. They offer regular conversion bonuses, and often offer bonuses and discounts for transferring or directly buying miles. They get lots of business from people in North America optimizing for star alliance rewards.

 

PLM has done some of this (transfer partners) but not much, and they could be more aggressive. This doesn't make any difference in the short run, but in the long run PLM has a few more levers they could pull to add revenue.

[Homestead31]

there has been some very good work done in this thread.  In particular, i would like to call out Wabuffo and Dr. Aybolit, but there have been many others that have done great work.  I also think it bear mentioning that part of the reason the debate has been so robust is the differing opinions, with Wabuffo leaning towards the more negative side, and the good Dr. leaning toward the more positive side.

 

In that spirit, i'd like to ask if perhaps the forest is not being missed for the trees a bit at this point?  And in that spirit, i'd like to solicit opinions on what would happen if AeroMexico 1) does wind up posting their ownership in PLM as collateral (would require permission from Aimia, but perhaps there is a way around this as has been suggested), and Apollo does wind up owning the equity in AeroMexico and 51% of the equity in PLM?

 

If this were the case i think the obvious risk is that Apollo / the BK process would find a way to cancel the $100M that is owed to PLM by AeroMexico. And lets include the possibility Apollo - as owners of AeroMexico - abandons the pledge to pay a minimum of $400M for Aimia's stake in PLM.

 

This is all very draconian............ but then what?

 

it seems to me that PLM would STILL be the most valuable part of AeroMexico (see multiple thought pieces on loyalty being a better business/worth more than flying planes) and AeroMexico (under Apollo) would STILL be contractually bound to PLM until 2050, and thus Apollo - with $300+ BILLION in AUM - would STILL want to own 100% of PLM?

 

So, even if a draconian scenario develops, Apollo winds up owning the equity of AeroMexico and 51% of the equity of PLM, and Apollo balks at the $400M number, isn't it STILL likely that Apollo would offer to pay some number that would STILL equate to something close to the current market cap of Aimia, giving you everything else for free?

 

to be clear, i realize that a full scale liquidation is possible, but that seems pretty unlikely, especially in light of the news surrounding the new 5 minute Abbot test which has to be good for air travel.  so i am not saying that that scenario is off the table.

 

but it seems like alot of brain power is going into the idea of Apollo and the DIP, and not much brain power is going into what it will actually mean for Aimia, and it seems like given the quality of the PLM business, the value of the asset, and the contract until 2050... even if Apollo winds up owning the other half of PLM, things will STILL be ok for Aimia?  and in fact, given Apollo's deep pockets, a buy out of Aimia might happen on an accelerated timeline (but on less favorable terms).

 

i am putting this out there hoping it will be torn apart, so please do.

[Dr. Aybolit]

wouldn't Apollo, as controlling shareholder or near controlling shareholder of a newly reorganzied Aeromexico, have to honor the contract that Aeromexico signed with Aimia on the minimum buyback values for their 49% PLM stake, that being no less than US$400M?

 

obviously presuming AM assumes those PLM contracts during the bankrutpcy, which I think they must, given they signed them one day before filing chp. 11, no?

 

 

[Homestead31]

Dr A - yes, i think they would have to honor the $400M floor.

 

But just for arguments sake - lets say that somehow in the BK process that contract goes away.

 

My point is that even without that contract, a few things should be abundantly clear:

 

1) the loyalty business is a way better business than flying planes

2) scrapping an existing loyalty business and attempting to build a new one from scratch rather than just paying a fair price for the 49% of the existing one that you don't own would be insanity, especially when you have pockets as deep as Apollo

 

I am thus positing that the real risk here is not in the minutia of the DIP, but rather a complete liquidation of AeroMexico.

 

Yes, it is possible that the $100M owed to PLM is a casualty of the BK process (although i believe it was Dr A that pointed out the fraudulent conveyance angle), but even if that $100M is lost forever, and even if Apollo was able to scrap the $400M floor, they would still want the asset bad enough - AND soon enough - that they would be willing to pay some price greater than Aimia's current EV.

 

So, absent a complete liquidation, which increasingly seems like it is off the table, it seems like the AeroMexico BK will wind up being a good - if not great - thing for Aimia, because the net of it all is likely to be that the sale of Aimia's 49% stake in PLM is pulled forward dramatically.

 

Thoughts appreciated.

[Cigarbutt]

Disclosures :

-The involvement here and now has to do with a general interest in reorganizations.

-There is some formal knowledge and practical experience with a reasonable track record but I’m basically a plumber who likes to read.

-Judgement qualification from this post needs to take into account that I grossly confused what needed to be done and what ended up being done during the Aimia transformation.

-I would be happy for a good outcome for those holding long positions but the PLM aspect seems to indicate a very uncertain future for the next 12 to 24 months (what this post is about) and I have doubts about the strength of the recovery for the entire airline sector.

 

Part I – The fraudulent transfer part

On a first-level analysis, entering a contract including a loan where the debtor has a reasonably good idea that it will not satisfy the conditions does raise a fairness question. However, the basic premise underlying the conveyance issue is related to the fundamental question of the potential link between pre-petition “transfers” and depletion of the debtor’s estate. From a purely business-as-usual point of view, the transaction increased the value of the estate. It seems that it would be hard to argue for harm when the counter-party to the minority entity that negotiated the contract was the highly distressed party holding a “joint” but majority ownership in the same entity, a party whose fiduciary role had clearly shifted to include also secured creditors with collateral tied to the key operating assets of the airline. It also seems that it would be hard to argue that filing was not a possible outcome, even if imminent, as it turned out to be.

 

Part II – The wrongful trading part

An argument could be made that Aeromexico delayed filing in order to misrepresent its condition and enter into negotiations with lenders and associated parties being exposed to incomplete knowledge. Filing in the US means the concept of the zone of insolvency remains just that, a concept. US bankruptcy laws and case law suggest that companies can continue to operate even if technically insolvent as long as the purpose of the transactions is to continue to keep operations running and to maximize the value of the estate. Filing on June 30th simply crystallized something (Aeromexico Board had to include other constituents in the decision making, in this case and in substance, the key secured creditors) that had started to occur in the days, weeks and even months before the filing. When entering the vicinity of insolvency and after filing, financial creditors have to be differentiated from trade creditors. PLM, again at this level, has a hybrid character. Trade creditors may have a mutually assured destruction type of relationship and I would argue that the value of PLM without a viable anchor airline is zero (well not zero if liquidation value is considered but that’s another story). Trade creditors (vs financial creditors) typically have weaker negotiating positions. Of course, if the argument is that the PLM value has increased or will be easier to monetize during bankruptcy then sharing the pain is not an issue.

 

Part III – PLM valuation from different perspectives

It always boils down to valuation but, with PLM, it's not only the numbers that count. All valuation analogies are welcome but the idea that an asset value grows in bankruptcy is quite unusual and the scale of this phenomenon, relatively new. If you were providing DIP financing, what would be your objectives (objectives relevant to PLM valuation and the minority interest)? Specifically for Aeromexico, given the unprecedented external shock and excess capacity and given the relative lack of competition to grab the assets, the DIP lender will aim to achieve a low valuation for the estate, will right-size (downsize++) the footprint and will try to renegotiate, in that context, all relevant contracts and partnerships. The PLM minority interest holds valid arguments and economic value but the territory appears to be threatening. I doubt Apollo is entering this phase with a semi-improvised plan. It seems to me that the minority interest may have to compromise and settle for lower “recovery” value now in order to benefit perhaps far into the future when normal levels of billings are reached again but Apollo may be looking for ways to have full control before. This sure is interesting.

 

PS

This post was proofread to maximize “fairness” of opinion and minimize personal “attacks” but the exercise was a reminder that, not so long ago, I was arguing with wabuffo about his valuation of PLM, which I considered too low and about the potential overestimation of side effects related to relatively benign corporate skirmishes.

 

 

[wabuffo]

FWIW - my view is that there is a number of scenarios that could play out if I was gaming the PLM relationship from the Apollo side inside of Aeromexico's Chapter 11 filing - ranging from good to catastrophic for AIMIA.

 

Let's put aside a couple of scenarios that have been already mentioned.  First, Aeromexico going from a Chapter 11 (reorg) to a Chapter 7 (liquidation).  I don't know how to handicap the macro environment for the airline industry.  But I do believe there is a non-zero chance for liquidation if air travel remains depressed long enough.  To survive, these airlines need cash flow -- and not even more leverage.

 

Also, at no time am I saying that Aeromexico will renege on its $100m PLM receivable.  It has the option to convert the $50m USD loan to a second $50m tranche of pre-paid seats.  The marginal (and opportunity) cost of $100m in prepaid seats to Aeromexico is pretty close to zero given the marginal cost of another "butt in the seat" when the planes are flying half-empty for the foreseeable future.  Since paying this loan back requires near-zero cash outlays for Aeromexico, they won't default.  Why in the world would Aeromexico ever default on such an "almost-free cost" loan redemption?  So let's all agree that the $100m will be "paid back" under almost all scenarios - except liquidation.

 

So here's the scenarios as I see them:

1) Aeromexico rejects the specific executory contracts under Chapter 11 that govern its service agreements with PLM Premier and plans a re-start of its own 100% owned loyalty rewards program.

 

As was noted in the Reorg webinar, if I were the Apollo and debtor legal teams, I would be poring over all of the executory contracts that govern the PLM relationship.  This relationship is governed by a plethora of individual contracts (securities/purchase agreements, guarantees, finance agreements, service agreements, third-party service agreements, purchase/sale agreements, etc).  I would take a scalpel and reject only those contracts that govern the service agreement between Aeromexico and Club Premier.  This would have the effect of stranding the PLM subsidiary without an airline sponsor while honoring the other agreements.  Obviously this harms Aeromexico at first since it owns 51% of PLM and locks it into owning a shell with AIMIA til 2050.  Under this scenario, Aeromexico would also let expire the seven-year put option to buy out AIMIA's share since it is no longer worth a minimum of $400m USD.

 

I would argue that there would be some residual value in the PLM shell - so its not a total loss for Aeromexico.  More importantly, the NPV of starting fresh with 100% ownership is a huge plus.  Perhaps a $1B or more.  Starting up a float-based business is also pretty quickly cash-accretive since partners pay for reward miles and it takes 18-24 months for reward redemptions.  And as we saw from the Air Canada Aeroplan repatriation, the credit card companies can fund that start up by paying upfront to remain inside Aeromexico's new loyalty program and retaining their cards' front-of-wallet consumer mindshare (since the banks make more money from the interchange on all that front-of-wallet credit card spending).

 

What would it cost Aeromexico to reject their Club Premier Commercial Participation & Services Agreement?  I have no idea.  There are formulas within Chapter 11 for building lease rejections as well as airplane lease rejections - but this one would have to be argued in front of the judge.

 

2)Aeromexico and the DIP lender offers AIMIA an exchange of their 48.85% ownership for participation in a like-for-like super-secured Tranche A/B DIP loan.

 

We explored this option earlier.  AIMIA might even be offered incentives to take their payout in Aeromexico equity rather than being paid out for their DIP loan at the end of the Chapter 11 process.  I think Aeromexico and Apollo would prefer to maximize the conversion to equity to give Aeromexico a stronger balance sheet coming out of the bankruptcy. 

 

I think this is where option 1 could give Apollo some leverage in coercing AIMIA to accept the deal.  If option 1 can portrayed as a real and legally viable option, this might force AIMIA's hand.

 

3) The do-nothing scenario - status quo

 

While this may be the default scenario, I do think that Aeromexico wants to take over the portion of PLM it doesn't already own.  Under this scenario, Aeromexico comes out of Chapter 11 and immediately buys out AIMIA for $400m USD (assuming PLM adj EBITDA x 7.5 is under that amount which is likely).  It may even be possible that instead of Aeromexico buying out AIMIA, it permits Delta to come in and pay the $400m to replace AIMIA in the PLM relationship.  Delta probably prefers that too - since they are the masters of maximizing the value of an airline loyalty program.  It also gives Delta a more secure position from which to invest in the Aeromexico for the future of their alliance (rather than equity in the airline itself).

 

Of course, there's always other possibilities that I lack the imagination to conceive.  My bet is a combination of 2 and 3 but using option 1 to drive down the price of PLM in real-time.  ie, a partial conversion of equity to DIP financing while retaining a lower percentage ownership that eventually gets bought out by Delta/Aeromexico.

 

My 2-cents,

wabuffo

[wabuffo]

Mittleman's pumping their Cineplex position on VIC (45-day guest access required).  Note their cost basis in the stock is probably much higher than the price noted on the idea when it was posted.  I don't know the ins and outs of their fund structure but I assume AIMIA shareholders also own this now via the LP structure.

 

https://valueinvestorsclub.com/idea/CINEPLEX_INC/2558512132#description

 

wabuffo

[5xEBITDA]

Mittleman's pumping their Cineplex position on VIC (45-day guest access required).  Note their cost basis in the stock is probably much higher than the price noted on the idea when it was posted.  I don't know the ins and outs of their fund structure but I assume AIMIA shareholders also own this now via the LP structure.

 

https://valueinvestorsclub.com/idea/CINEPLEX_INC/2558512132#description

 

wabuffo

 

Meh. Not super impressed with the thesis...I know he has a long history with the theater industry, but I think the bigger picture is missed here. It doesn't make sense to say that just because theaters re-open people will go back. There was a great article regarding this on Bloomberg yesterday - I recall about 60% of survey respondents (who described themselves as frequent movie goers) won't go back to the theaters just because they re-open. The second problem is his reach that the Company will be able to thrive during a flat box office as they've done in the past without going into detail on how they did that. You thrive in a flat market by having pricing power, which being a #1 in the market gives you. Increasing ticket & food prices is a great way to offset declining ticket volumes while also boosting your margins. I think it's safe to assume that once theaters re-open they will need to cut pricing in order to just get people in the door. It makes zero sense for him to be modeling a go-forward margin higher than the 2009 - 2019 average.

[wabuffo]

sorry for turning this into the LATAM airlines bankruptcy thread, but I found the Avianca Presentation to Prospective DIP lenders here:

http://s22.q4cdn.com/896295308/files/doc_presentations/Avianca-Prospective-DIP-Lender-Presentation-(14AUG)_PUBLIC-vF.pdf

 

It adds some interesting perspective on Avianca's deal with Advent Capital for their 20% stake in LifeMiles.

 

- technically, the $168.5m USD is for 19.9% of Advent's stake in LifeMiles.  But the deal also includes an embedded call option whereby Avianca's can acquire the remaining 10.1% that Advent owns.  So I'm not sure its apples-to-apples with my Aeromexico calculations because of the value of that embedded call option (ie Avianca is paying a call premium somewhere in that $168.5m).

 

- according to the presentation, Avianca gains, in effect, 100% control of LifeMiles, and then pledges its equity in the loyalty rewards as collateral in the DIP loans.  They list a recent appraisal that values LifeMiles at $1.6-$2.6B (!).  I have no idea how they get to that value and it makes no sense to me given $168.5m buys 19.9%.  Even if they are talking Enterprise Value instead of Equity Value, it still makes no sense.  At best, I get $1.1B in my calculations.

 

You can see the template emerging for a potential Aeromexico, Apollo and AIMIA deal if they want to do it.  Avianca is providing the formula. 

 

1) Convert part of AIMIA's stake in PLM to DIP loans while embedding a call option at Aeromexico's choice for the remaining PLM stake owned by AIMIA.

2) Post the PLM equity as collateral for the DIP financing while giving AIMIA the option to convert all or part of their DIP loan to Aeromexico equity. 

3) Aeromexico and Apollo can even offer a sweetener to AIMIA by letting PLM distribute some of its excess cash to AIMIA now as a dividend as part of the deal.

4) Post-reorganization, Aeromexico buys out the rest of AIMIA's PLM stake via the exercise of the call option.

 

wabuffo

 

 

[Cigarbutt]

The airline loyalty landscape continues to evolve in a very interesting way. If i understand (infer to some degree) correctly, negotiations are happening this weekend in relation to GOL filing for bankruptcy. They have a loan coming due for which Delta is a guarantor (Delta did guarantee that loan before when it had ties with GOL, the guarantee was maintained despite Delta switching "alliance" from GOL to Latam and the loan guarantee's collateral is GOL's majority ownership in its loyalty program!). Anyways, it seems that the value of Smiles has come down (there is a mark-to-market mechanism here) and Smiles has little or no synergistic value, on its own, with Delta, especially if GOL goes down.

There are some generic references below but it seems to me (submitted with the least amount of irony possible) that Aimia could be interested in buying the majority position held by GOL from Delta since Aimia may have developed an expertise with loyalty programs in distress and since their stance may include a relatively positive outlook for the rebound part of the cycle. Monetizing a loyalty stake in good times has a higher propensity for profits if bought in distress (and if a rebound occurs).

https://www.reuters.com/article/us-delta-gol-debt-analysis/delta-facing-its-own-troubles-may-have-to-repay-300-million-on-behalf-of-brazils-gol-idUSKBN25N1BG

https://loyaltylobby.com/2020/08/28/delta-on-hook-for-300m-in-loans-made-to-gol/

from the second link: "Gol certainly doesn’t want to lose its loyalty program – Smiles that has very little strategic value to Delta beyond perhaps able to sell it to a third party to recoup some cash (Aimia?)."

Disclosure: i'm not the author of the second link and did not participate in the redaction of the four comments.

[LTcap]

Interesting and thanks for sharing. Obviously serious speculation whether AIM will have an opportunity to get involved and even wants to.

 

Separately, I wanted to put some math behind how cheap AIM really is at ~CAD$3.50. Currently, prefs trade at 35% discount to par but let's assume par for conservatism.  Cash + cost of Clear Media stake (US$75mm) covers those prefs.  I also think Clear Media likely worth far more than 5x EBITDA, but again for conservatism.  Let's then assume Kognitiv, BIGLIFE, and Mittleman stakes are completely worthless. That implies you are paying ~CAD$330mm (AIM's market cap) or ~US$255mm for PLM stake.  That equates to discounts of: 1) 45% to US$400mm min buyout price + pro rata cash/Aero loans and 2) 30% discount to offer made by Aero in July 2018 (that even AIM's awful old Board knew to reject immediately).  Yes, COVID has made airlines and likely loyalty programs less valuable.  But, do you really think Aero/Apollo would rather recreate a loyalty program than paying US$255mm for AIM's stake?  I'd say that's HIGHLY unlikely.  As stated by others, the primary risk at AIM's current price seems to be that Aero liquidates but that seems very unlikely w/Apollo's $1b DIP on the table. 

 

Secondly (and at the risk of stating the obvious), I wanted to put some updated math behind AIM's potential upside. Assuming in CAD: $190mm cash, $150mm Clear Media (10x FY18 EBITDA), $110mm Kognitiv (50% discount merger value), $615mm min buyout price + pro rata cash/Aero loans, and $40mm BIGLIFE (valuation from AirAsia's last purchase) then deducting prefs at par implies ~CAD$8.25/sh or ~135% upside.  That's a large margin of safety and compelling risk/reward unless you truly believe Aero is liquidating OR planning to create their own loyalty program (which would also assume the judge allows them to reject the recently amended PLM agreements and that seems unlikely).

 

Lastly, I don't believe AIM will be required to fund more to Kognitiv per the merger agreement.  The referenced "section 6.16 Aimia Deficit" seems to have expired 60 days after close and that has past.  Furthermore, AIM seems to have inserted "section 5.5 Voting Power Limitation" so that AIM's voting interest will never exceed 49.9% so therefore AIM will never have majority ownership and be forced to fund Kognitiv.

 

Look forward to hearing feedback.

[wabuffo]

Cash + cost of Clear Media stake (US$75mm) covers those prefs. ...  Let's then assume Kognitiv, BIGLIFE, and Mittleman stakes are completely worthless. That implies you are paying ~CAD$330mm (AIM's market cap) or ~US$255mm for PLM stake.

 

Hi LTCap - welcome aboard.  Good analysis.  The one thing I would add is a penalty for the SG&A cash burn.  There is a reason for conglomerate discounts - plus AIMIA has no cash coming in from any of its "investments".  Management has made an estimate of $15m per year and one should add the $4m tax penalty on the preferreds (I'm excluding the value of the actual preferred dividends). 

 

If one slaps a 10x multiple on those cash outflows, that's $190m that one should add to your $330m value to get to a current value of $520m to compare against the implied value of PLM (i'm doing some math short-hand here).  That's not too far from current best case estimates.

 

In reality there is some minimal value in the other stakes (Kognitiv, BigLife, etc) - which makes the anticipated return pretty ho-hum, IMHO.

 

Thus, the market seems to be fairly valuing the sum-of-the-parts. FWIW.

 

wabuffo

[LTcap]

Wabuffo - Why 10x for overhead? Said differently, do you believe they will invest in no companies that will provide any distributions to cover the overhead over the next 10 years? What about the pile of cash that generates some interest income?  You also must be assuming PLM sold near-term, otherwise its distribution will cover overhead in the interim.  I respectfully disagree w/that view.

 

But's let use your aggressive 10x, then you get to CAD$520mm or ~US$400mm.  Yes, that's the minimum buyout price BUT there's pro rata cash and Aero loans that equates to another ~$CAD1.00 per AIM share. 

 

BIGLIFE was valued at implied ~CAD$0.40 per AIM share in 2018.  W/AirAsia growing, I suspect that's certainly worth more today. 

 

You also completely disregarded upside in Clear Media.  I'd encourage you to study that business and its new sponsors.  I'm confident my assumption of 10x 2018 EBITDA will be conservative.  But just using mine, that's ~CAD$0.80.

 

Re: Kognitiv, that business alone was valued above the merger value that I'm hair-cutting by 50%.  I agree this is the biggest unknown and black box, but of course it's free upside.  Upside that could be another 50%+.

 

So again assuming your aggressive 10x overhead AND assuming Kognitiv is a doughnut, then the above implies upside of ~$CAD2.20 or 60%+.  Limited downside and 60% upside doesn't seem ho-hum, but maybe that's just me. 

 

And don't forget, all the above math excludes the ~CAD$7 per share of operating/capital losses or benefit of buybacks.  AIM already bought back 2.7mm at ~CAD$3 per share in June/July.  I suspect those continue at the current very low valuation.  Those will improve all these valuation numbers.

 

[Cigarbutt]

@wabuffo  Thanks for the reorg webinar (interesting stuff).

If you enjoy these reorg webinars...

...

I wonder what happened during August's Aeromexico DIP negotiations?  Why did the size of the DIP increase?  Was DIP funding widely available and cheap?  Did Aeromexico's cash needs suddenly grow because results were poorer than forecast?  Were Reorg's sources just not that plugged in to what was really going on? 

Who knows...

Regardless - take a listen/view and if more Aeromexico Ch 11 stuff gets posted, I will post a link here.

wabuffo

I've been wondering about the same sub-topic (ie context of the DIP-financing negotiations). The following suggests potential answers:

The relevant part runs from 34:16 to 38:32. The lawyer's firm, as disclosed, has been representing (and 'counseling') Apollo for the Aeromexico-DIP adventure. The slide that compares the three Latin America insolvency cases can be found here (page 4):

https://www.iiiglobal.org/sites/default/files/media/Airline%20Panel%20Powerpoint%20Slides.pdf

So, it appears that the market for insolvent airlines filing in the US under chapter 11 is buoyant. They describe the DIP-financing environment as extremely robust and, in other parts of the webinar, someone is even using the bidding-war narrative. For the Aeromexico case, it's mentioned that there were many bidders and the court approval seemed to have been almost a formality, suggesting competitive terms and alternative options. This can mean many things but smart money is ready to inject new money which suggests at least some fundamental reasons for the optimism. Putting unusual optimism aside, solid DIP-financing plans do increase the odds of coming out of the restructuring process with a more solid balance sheet. It seems that Aeromexico did not even need the money 'lent' by PLM pre-petition but (IMO) they were able to extract competitive terms anyways at that stage. However, one has to temper the optimism to some degree based on other comments made during the webinar and during other various "analysts'" presentations in relation to the climate surrounding insolvency-financing deals overall. Some refer to an easy-money mentality related to mountains of dry powder backed by printed money and central puts. Also mentioned in this webinar, people describe how unusual the situation is where a company (Hertz) involved in a related industry recently almost succeeded in raising equity money from momentum investors only to be stopped indirectly by SEC-related regulatory pressure and scrutiny. Overall, this is positive for the PLM stake but we are truly living during interesting times.