AIM.TO - Aimia

[bizaro86]

Here is an interesting analysis that would tend to validate a more optimistic assessment:

https://seekingalpha.com/article/4143261-aimia-clown-car-fell-gold-mine-still-golden

 

There is a lot of info circulating on Aimia and the quality is uneven but this piece is quite good in terms of business insights and relevance.

Still, the author describes a potentially favorable transition and, at the same time, suggests that the Board and mangement should be replaced...

Recent Sedar disclosures suggest that a shareholder may want to take a more active role.

 

I viewed this investment mainly as event driven and not as a transition opportunity.

AIM will report Q4 numbers on Valentine's day.

 

Some of the assumptions there don't seem very conservative. The part where they take the PV of the remaining term on the Mexican contract and then put a terminal value at that level seems especially aggressive to me. I know their airline partner owns part of the business there, but why wouldn't you expect the terms to get worse on a renewal.

 

I don't think Air Miles is analogous at all, and Aeroplan has negative momentum getting new partners, which they had even prior to losing Air Canada. They lost Sobeys (big grocery chain) to Air Miles when they bought Canada Safeway. They also lost Rexall to Air Miles. Basically, aeroplan is the second tier here, and without Air Canada I don't see why retail partners would sign up. If they get Porter or someone similar maybe that helps, but why would those (second tier) airlines give them a big discount?

 

Air Canada gave them the discount because they were selling Aimia equity for big $$. What does someone else get out of it? Maybe you get 3% off for buying in bulk, but that'd be about it.

[StubbleJumper]

Well, that's certainly the optimistic viewpoint, and it might actually work out that way.  AIM will be okay if their Aeroplan mile holders do not rush to the exits.  And on that point, so far, so good.

 

The risk is principally one of cash flow as rewards reserves are  only ~$400m while the value of outstanding miles awarded is $2b+.  You can add some cash from ops to that, but you still end up with considerably less cash available to fund rewards than the value of the outstanding miles.  If a healthy percentage of plan participants redeem, it could be ugly.  For whatever reason, the Seeking Alpha cash stress test doesn't seem to have examined scenarios where participants redeem more heavily. The rest of the cash flow analysis looks thorough and has reasonable assumptions, but there is also much doubt about the acquisition of retail partners as AirMiles seems to have already wrapped up the most attractive targets.

 

Beyond the risk of higher redemptions, there remains much doubt in my mind about the behaviour of credit card holders.  In particular, to my knowledge all of the cards have an annual fee.  Are people going to continue to collect de-valued Aeroplan miles and blissfully pay the annual fee and forego other rewards?  Certainly consumers have demonstrated a great deal of inertia in their behaviour, but how many will get a clue and switch to a better credit card?  The cash stress test assumes that they'll lose 10% of the credit card mile accumulation, but it is reasonable to believe that 90% of card holders will be oblivious to what is happening to the program, or too lazy to bother changing their credit card to a different program? I'm a little surprised that the pessimistic case didn't contemplate a higher level of abandonment.

 

I would certainly acknowledge that most Canadians seem blissfully unaware of what is happening to Aeroplan, but is it truly reasonable to expect this to continue through 2020?  The next couple of quarterly reports will be fascinating.

 

 

SJ

[Cigarbutt]

Q4 results are out.

SE (even including goodwill and intangibles) is negative as the real value of the Nectar franchise is off the books.

 

My take, on the whole, is the absence of a major break in the trend. Aimia will try to become a "better" basic loyalty plan that will look very much like Air Miles which is already well established in the Canadian (crowded?) market. So, over time, I expect a declining intrinsic enterprise value. May not be a straight line.

 

Too early for a significant trend but dissecting some significant numbers for the core Aeroplan coalition program:

 

Accumulation activity 2017 (YoY variance, %):  Q1:5,4  Q2:1,2  Q3:2,0  Q4:(0,9)

Redemption activity 2017  (YoY variance, %):  Q1:3,9  Q2:1,8  Q3:4,7  Q4:9,9

 

[petec]

Ha - that trend is really interesting!

[StubbleJumper]

Q4 results are out.

SE (even including goodwill and intangibles) is negative as the real value of the Nectar franchise is off the books.

 

My take, on the whole, is the absence of a major break in the trend. Aimia will try to become a "better" basic loyalty plan that will look very much like Air Miles which is already well established in the Canadian (crowded?) market. So, over time, I expect a declining intrinsic enterprise value. May not be a straight line.

 

Too early for a significant trend but dissecting some significant numbers for the core Aeroplan coalition program:

 

Accumulation activity 2017 (YoY variance, %):  Q1:5,4  Q2:1,2  Q3:2,0  Q4:(0,9)

Redemption activity 2017  (YoY variance, %):  Q1:3,9  Q2:1,8  Q3:4,7  Q4:9,9

 

 

Ouch.  The Q4 numbers are pretty scary.  I guess we'll see in the coming quarters whether this is a one-time blip, or a real trend that might have adverse cashflow consequences.

[zhengmit]

What is difference between accumulation vs. gross billing?  GB is up 2.0% YoY and I assume that people are still accumulate points YoY up despite rising redemption. 

[Cigarbutt]

Gross billings and accumulation activity correspond to the same basic idea: selling Aeroplan units (miles issued) for cash.

You can expect quarterly noise in the normal course of operations and there are variable promotional activities that may cause fluctuations.

Historically, the Aeroplan Program has shown a seasonal pattern with relatively higher redemption activity in the first half of the year and relatively higher accumulation activity in the second half of the year.

So too early for a clear trend and you may complement your thought process by considering how you would react as a consumer with an Aeroplan credit card going forward.

I wonder if some of the consumers who still "re-engage" may simply have a target in mind before more definitive redemption?

 

[clutch]

Looks like they lost the partnership with Esso as well:

https://www.aeroplan.com/essonews.do?currentLanguage=en#esso-faq

[gokou3]

Some passionate writing here:

 

Time To Grab My Pitchfork (AIM Edition)

http://adventuresincapitalism.com/2018/04/11/time-grab-pitchfork-aim-edition/

 

Disc: long preferred B, no voting rights

[bizaro86]

That could have used more math and less immolation graphics. I don't see how you can get to that price target on what will be left after they drive aeroplan into the ground.

 

I think if a second tier or startup airline was looking for a partner, they'd pick PC Optimum over aeroplan.

 

Recap: aeroplan has lost a big grocer, a big pharmacy, and a big gas stain chain in the last few years. PC Optimum is a new program that has the biggest grocer, the biggest pharmacy, and the gas station that aeroplan lost. I know who I'd pick.

 

 

 

[Cigarbutt]

From the article:

"On August 25th, Aimia announced the sale of its Air Miles Trademarks for total consideration of $53,750,000 (before up to $13,750,000 of future payments). This represented a sale price of approximately 7 times current pre-tax cash flow, at a time when well-known trademarks often transact at approximately two to three times this multiple."

 

I don't think that is a reasonable assessment. From what I know of this market and of of Diversified Royalty Corp (DIV), the purchase price was perhaps 10 to 25% lower than comparable transactions, reflecting distress at Aimia.

 

Anecdotal, but I've met a few Aeroplan frequent flyers lately. I understand that 1-they plan to use their points for AC flights and see 2020 as a clear deadline (ie aim to have points at zero then), 2-find very little value elsewhere in the redemption offers but 3-are relatively hopeful that Aimia will come up with alternatives to the Air Canada option and are still planning to accumulate points once that happens.

 

The annual meeting happens soon and there will be Boardroom changes. I understand Mr. Micheal Fortier is leaving. I see this as a negative because he is somebody I respect (competence and integrity).

 

 

[bathtime]

Mittleman continue to increase their stake, now at 16%+, and now have 3 board positions which happened following this article:

 

http://business.financialpost.com/news/fp-street/u-s-shareholders-look-to-bust-some-heads-at-aimia-meeting

 

 

 

 

 

 

[Cigarbutt]

I thought the following was interesting:

https://seekingalpha.com/article/4162810-mittleman-investment-management-1q18-commentary

 

The investment thesis primarily depends if you can think Aimia can renew its redemption offers.

IMO, the renewed option will disappoint.

 

However, from reading the above, learned two things:

1-will know more about the game plan on April 26th.

2-some assets (with real value) are apparently legally separated in a different shell and that is very interesting from the preferred point of view.

 

"Another key facet of our investment thesis with Aimia is that there is plenty of value in other Aimia holdings to protect us should Aeroplan not survive. That subsidiary, Aimia Canada Inc., is distinct from the holding company, Aimia Inc., so liabilities from that segment shouldn't destroy the value of the other assets held by the holding company, assets which include, for example, its 49% ownership of PLM Premier (5.3M member, fast growing coalition loyalty program anchored by Aeromexico, Mexico's flagship airline)."

 

...

 

"Even if Aeroplan were to implode on a tidal wave of redemptions due to the fear that Air Canada flight options would not be replaced by comparable seats on other airlines flying similar routes, then the other assets Aimia owns appear to be worth no less than US$1.60 (C$2.00), net of debt and preferred stock, which is 19% higher than the current price of US$1.34."

 

Will try to look into this as I understood that the redemption liability could negate the value of remaining assets in a liquidation scenario.

[gokou3]

Another fund wanting against the current board:

 

22NW Fund Issues Statement Against the Re-Election of Aimia Board of Directors

https://web.tmxmoney.com/article.php?newsid=6270142716812319&qm_symbol=AIM

 

22NW owns approximately 4.3 million shares, or about 3%, of Aimia.

 

...we note that the Company has adopted a Majority Voting Policy pursuant to which any director nominee receiving fewer than 50% of votes cast "for" his or her election at the AGM is required to immediately tender his or her resignation."

 

 

[Cigarbutt]

Q1:

Numbers for the core Aeroplan coalition program:

 

Accumulation activity (YoY variance, %):  2017    Q1:5,4  Q2:1,2  Q3:2,0  Q4:(0,9)      2018    Q1:(2,8)

Redemption activity  (YoY variance, %):  2017    Q1:3,9  Q2:1,8  Q3:4,7  Q4:9,9        2018    Q1:9,6

 

The burn/earn ratio was at 109% in Q1. They expect moderation of that trend but redemption pressure is likely to persist.

PLM continues to perform well.

 

New CEO to come and evolving business model. The most likely scenario is to carry on until the 2020 transition.

 

Seen as a going concern, there is some potential value for the common share although I still think that, post 2020, the preferred will be the fulcrum security.

 

The problem I see at this point is the fact that preferred shareholders have a passive role and I can't clearly see how the preferred price may effectively relate to its share of the enterprise value as there are no dividends in sight and as the risk profile will tend to remain elevated during the transformation. The bank debt will continue to put pressure on cash flows as leverage is expected to come down and entities that are forcing change are common shareholders.

 

Preferred shares may come to be seen as cheap leverage with dividends that simply accrue.

The whole process may take a while and one has to discount the eventual value that may be realized.

 

[KCLarkin]

https://www.bnnbloomberg.ca/a-very-big-deal-westjet-rbc-team-up-for-new-loyalty-program-1.1092288

 

[Cigarbutt]

Thanks for the link.

 

In the evolving crowded Canadian loyalty market:

-WestJet and RBC team up to increase market share.

-Air Canada (IMO unlikely to team again with Aimia) values (NPV) its own loyalty program at 2 to 2,5 billion$.

-Air Miles continues to consolidate its market share at the plain vanilla loyalty level.

 

What is left for Aimia?

 

[vikx01]

Air Canada, TD, CIBC, Visa offer to buy Aimia’s Aeroplan in $2.25B deal

https://www.bnnbloomberg.ca/air-canada-td-cibc-visa-offer-to-buy-aimia-s-aeroplan-in-2-25b-deal-1.1113562

[petec]

I always felt an AC buy was a distinct possibility - I'm just amazed it's legal. Isn't there a risk that someone sues them for cutting the contract and then buying the company? I guess not since the contract was expiring but it amazes me.

[Cardboard]

To me it shows how incompetent Air Canada truly is: spend money on creating your own plan, erode the existing brand, create significant uncertainty around it and then buy it out...

 

Maybe that they saved some money doing it this way instead of a properly negotiated sale but, I believe that the costs and lost credibility outweigh these benefits.

 

Cardboard

[StubbleJumper]

To me it shows how incompetent Air Canada truly is: spend money on creating your own plan, erode the existing brand, create significant uncertainty around it and then buy it out...

 

Maybe that they saved some money doing it this way instead of a properly negotiated sale but, I believe that the costs and lost credibility outweigh these benefits.

 

Cardboard

 

 

 

Sure, that's one possibility.  The other possibility is that AIM's management team was arrogant and intransigent during the months and years leading up to AC's announcement, and perhaps at the time AC viewed a deal as unrealistic.

 

I'd say the story is probably fascinating, but chances are we'll never know how this bizarre set of circumstances came to be.

 

 

SJ

[Cigarbutt]

Agree that the cut-throat competition went too far. It seems to be a bad case of who would blink first. Likely to be net value destruction in the end.

 

Surprised by the offer as I thought that reconciliation had reached a breaking point. From an outsider, the offer is relatively low but, if I were a stakeholder, I would hope for some negotiation. However the offer, as is, IMO, would be a relatively good outcome.

 

Will be interesting to follow because the offer is unsolicited and involves only the Canadian Aeroplan sub. Many outcomes possible. If the present offer goes through, Aimia would then continue its liquidation scenario. Interesting because, in a conceptual way, reward points accumulators are ranking above the prefs.

 

https://aircanada.mediaroom.com/index.php?s=22103&item=138439

[bathtime]

https://www.valuewalk.com/2018/07/mittleman-investment-management-investment-commentary-2q18/

 

Mittleman's Q218 Letter published yesterday prior to the bid:

 

We discussed Aimia (AIM CN) at length in our Q1 Investment Review, as it was the biggest detractor from that quarter’s performance. Our two director nominees (Jeremy Rabe and Phil Mittleman) were affirmed to the Board at the company’s annual general meeting of shareholders on April 27th. On May 8th, Jeremy Rabe was named President and Chief Executive Officer, replacing David Johnston, who exited shortly after our nominees joined the board. Jeremy was the founding CEO and a member of the Board of Directors of Aimia’s 49% owned JV with Aeromexico, Premier Loyalty & Marketing, and was responsible for the management of Club Premier, Mexico's leading coalition loyalty program, from its inception in 2010 through 2014, a period of outstanding growth. He was most recently an Operating Partner with Advent International, a leading global private equity firm where he provided strategic support to portfolio companies including LifeMiles, the loyalty program of Avianca. We are pleased with the recent progress made at the Board and management level and are optimistic that further evidence of success will be forthcoming. Aimia remains one of the most exciting investment opportunities in the public markets today. Our sum of the parts valuation is C$10.00 (USD 7.50), which is 4.25x the quarter-end price:

 

Aeroplan (Canada): ownership (100%), estimated min. fair value = C$1B, 10x C$100M EBITDA post 2020 = C$6.57 per share (we ignore the C$2B miles redemption liability for purpose of enterprise valuation, as airlines don’t charge frequent flier liabilities to EV in their M&A transactions, viewing it as an ongoing negative working capital benefit as long as business is a going concern, and a substantially reduced cash cost in a liquidation / run-off scenario which we view as extremely unlikely.) Aeroplan likely has strategic value well above our C$1B minimum estimate in that its 5M members and its key commercial contracts occupy a critical role at the nexus of a very valuable ecosystem involving TD Bank, CIBC, Visa, Amex Canada, and Air Canada, which have hundreds of millions of annual profits at stake in preserving it.

 

PLM Premier (Mexico): ownership (48.9%), est. fair value = US$489M, 10x US$100M EBITDA est. 2019 = US$3.21 per share 5.3M members in fast growing coalition loyalty program anchored by Aeromexico, Mexico’s flagship airline. Aimia invested US$124M for a 48.9% stake between 2010-2012, and since then received US$84M in cash dividends. At last financing round in 2012, PLM total enterprise was valued at US$518M, and it has grown substantially since then. Comps are Smiles Fidelidade S.A. (SMLS3 BZ) and Multiplus S.A. (MPLU3 BZ) and trade at 8x to 6x EBITDA recently, down sharply in emerging market sell-off, but fair value likely closer to 10x EBITDA for both.

 

Cardlytics (CDLX): ownership (2.978M shares), price on 6/30/18= $21.76 = USD 65M = US$0.43 per share

 

Think BIG Digital – Air Asia: ownership (20%), estimated fair value = USD 50M, US$3 x 16M members = US$0.33 per share

 

Air Miles Middle East (U.A.E.): ownership (100%), estimated fair value = 0, 1.4M members

 

Fractal Analytics (NJ, USA): ownership (5%), est. fair value = US$18M (5% of $360M (6x $60M sales) = US$0.12 per share

 

Assets (excluding cash) = C$1.817B = C$11.93 / US$9.07 per share

 

(+ cash & bonds C$500M – C$45M working cap. need– C$329M debt – C$43M pension deficit – C$323M preferred – C$34M accrued interest) = -C$274M

 

NAV: = C$1.543B / US$1.157B / 152.3M shares = C$10.13 / US$7.60 per share (CAD/USD = 1.31 as of 6/30/18)

[bizaro86]

If that's their true opinion of the value, I wonder if they'd prefer to go it alone.

 

You have to think having CIBC and TD on board the bid pressure Aimia to accept, or at least negotiate.

 

That said, presumably AC made this offer to the Aimia board before making it publicly, and it obviously wasn't accepted, so AC has decided to negotiate in public.

[bathtime]

Mittleman own 18% of Aimia, and Aimia's new CEO Jeremy Rabe (skilled operator in the loyalty arena) was appointed to the board this spring by Mittleman before taking over as CEO shortly after.

 

So clearly Mittleman won't like the valuation of this offer and will clearly see it as a lowball offer. Will be interesting to see how this unfolds.

 

The offer expires August 2nd which is a day before earnings August 3rd. Interesting that the bidding party would have insider access to a view into redemptions for this quarter. I wonder how that might that have affected the timing of their bid.

 

This has been my third largest position. I'm considering that my best option is to hold the shares for now.