AIM.TO - Aimia

[Homestead31]

no tax leakage... that's nice.

 

a billion in cash... that's nice.

 

even if you value the smaller odds and ends at $0, there is still significant upside... that's nice.

 

very highly regarded CEO at the helm, and a board that includes very experienced capital allocators... that's nice.

 

will be interesting to see what the company says about go forward plans.  for you canadians out there... i am assuming that the company would have to address the prefs before repurchasing common, does that sound right?

 

Company could pay off pfd's and debt and still have ~$2 per share in cash, which given Mittleman's view on the value of the remaining assets would likely be used to repurchase shares and close the gap... 

 

seems like still alot of upside here just through mittleman's incentives even if you don't agree with their valuation of the remaining assets

[Homestead31]

and Hanif Mamdani should be embarrassed by his complete inability to think strategically and remain calm under pressure.

 

https://business.financialpost.com/transportation/airlines/rbc-fund-urges-aimia-to-accept-bid-to-avoid-existential-crisis

[mcliu]

Haven't followed this closely, but was curious if anyone did the math on valuation pro-forma this deal?

 

Here's one that Mittleman just released:  https://www.prnewswire.com/news-releases/mittleman-brothers-llc-statement-on-sale-of-aeroplan-300700225.html

 

Thanks. That was fast.

 

What do you guys think of their valuation of PLM (C$1.3B) considering Aeroplan only sold for C$450M?

[SnarkyPuppy]

Haven't followed this closely, but was curious if anyone did the math on valuation pro-forma this deal?

 

Here's one that Mittleman just released:  https://www.prnewswire.com/news-releases/mittleman-brothers-llc-statement-on-sale-of-aeroplan-300700225.html

 

Thanks. That was fast.

 

What do you guys think of their valuation of PLM (C$1.3B) considering Aeroplan only sold for C$450M?

 

I'll admit I'm not very close to all of the details here, but isn't a key difference the ownership of deferred revenue liability? 

 

In the case of Aeroplan, Aimia had 100% ownership of the liability should there be a run on the bank.  In the case of PLM, the incentives are shared, so Aeromexico backing out of their side of the partnership to achieve fire sale price seems less likely. 

 

Aeromexico made a vulture bid of $180mm for aimia's stake in PLM - which was clearly a lowball and serves at a floor for valuation going forward.  This price would result in roughly -10% in mittlemans sotp - and given the context of the bid serves as a draconian downside scenario. 

[Homestead31]

 

 

What do you guys think of their valuation of PLM (C$1.3B) considering Aeroplan only sold for C$450M?

 

Aeroplan was a totally different ball game b/c it was a contract between Air Canada and Aeroplan, meaning that Air Canada didn't own equity in Aeroplan, so they did not care if the equity value of Aeroplan (ie Aimia) got destroyed.

 

In the case of PLM, AeroMexico owns half the equity, so their options are to 1) eventually pay fair value or 2) shoot themselves in their own foot and risking alienating customers by closing down their own program, only to then attempt to build another one. 

 

In any case, the PLM / AeroMexico contract doesn't expire for 12 years, so using Air Canada as a guide, there would be 9 years until AeroMexico would "have" to announce that they intended to shoot themselves in their own foot in order to build another program from scratch.

 

9 years is an eternity in the market, and my bet is that by then the company has either 1) bought back a bunch of its stock and closed the gap to NAV or 2) found something else smart to do with the cash horde that is under the watchful eye of skilled capital allocators

[wabuffo]

https://www.bloomberg.com/news/articles/2015-07-30/aeromexico-said-to-value-loyalty-program-at-1-billion-for-ipo

 

This is an article from three years ago when Aeromexico was reportedly considering an IPO for PLM at $1B USD (AIM owns a bit less than 49% of PLM equity, Aeromexico owns the rest).  The program has continued to grow since then so its probably worth more now.  Aeromexico mgmt has also changed their mind about selling PLM according to recent conference call transcripts.

 

Even at $1B USD, Aimia's stake would be worth ~$630m CAD. 

 

FWIW,

wabuffo

[Cigarbutt]

The valuation of frequent flyer programs (like PLM) is not exact science. But, in the right circumstances, they can be significant profit units.

 

Key inputs:

 

-Who has ownership control?

-Is the program well run and growing?

-Is there a long-term contract in place with the anchor partner?

-Is there a redemption mismatch vs funded costs?

 

Typically, EV/EBITDA and multiple to members are used.

References:

https://www.ey.com/Publication/vwLUAssets/etude-ey-sur-les-programmes-de-fidelite-des-compagnies-aeriennes/$FILE/etude-ey-sur-les-programmes-de-fidelite-des-compagnies-aeriennes.pdf

https://viewfromthewing.boardingarea.com/2016/06/30/people-forget-etihads-growth-strategy/

https://www.lek.com/sites/default/files/insights/pdf-attachments/AirlineFrequentFlyerProgram_LoyaltyProgramEffectiveness_LEK-ExecutiveInsights-1723.pdf

 

My understanding is that market multiples have come down since 2012 and, since 2015, this trend has likely been mitigated by growth at PLM, in terms of market value.

 

For the foreseeable future, incentives are aligned between AIM and AeroMexico to maintain and build value, whether through distributions or retained earnings. The major disadvantage for Aimia is that they won't tightly control the value realization of that component.

 

Interesting because, for the PLM investment, they end up in a spot that is not unlike their preferred equity in the capital structure, ie stranded.

[Aqul]

Why is this still trading so low? If you apply a 7x multiple to 2017 EBITDA for PLM, you get a NAV for AIM around $6.50. At the current price, it seems the market is valuing PLM at next-to-nothing.

 

The common might even be a better risk-reward now compared to a few weeks ago, as the 'run-on-the-bank-risk' has been transferred to Air Canada's balance sheet. Pro-Forma for the transaction, the NAV (excl. PLM) is comprised of cash and cash equivalents. Am I missing something? Or is it mainly because the market doesn't see a catalyst to unlocking the value in PLM? MIM's presence on the board suggests something should happen fairly soon.

[samwise]

It seems as if PLM is priced at 2-3x EBITDA. But the risk is what the plan for the cash is. I dont think there is substantial deal risk here.

[Aqul]

Yes, I'm getting just under 2x, which should be well below any reasonably fair multiple. The implied value of PLM is currently below the low-ball offer made by Aeromexico, which seems strange.

[KFRCanuk]

Aimia appoints new president and chief strategy officer in wake of Aeroplan deal

https://business.financialpost.com/transportation/airlines/aimia-adds-new-president-and-chief-strategy-officer-in-wake-of-aeroplan-deal

[NewbieD]

Would be interested to have feedback on thoughts of their allocation plans. The order I would use the capital:

- Share repurchase. Instant value creation and I see nothing stopping this post Aeroplan sale, at least to the tune of a couple hundred million.

- Sell CDLX and repurchase common. Does this have any strategic significance? Seems they could place their shares at a 5-10% discount and be happy.

- Further asset sales (PLM/AirAsia). The appointment of mr Felsher seems consistent with this?

- Pref repurchase ~ Yes, they have a higher cost than cash but << equity.

- Cash dividend. Might make sense as an end goal, but not likely before more value creating actions have been done?

 

Unlikely:

- Strategic investments: can they increase/add ownership of something at a good price? Maybe - but hard to switch MO.

 

Hoping to clear up that a cash dividend is unlikely short-term since I know I don't understand tax implications for me, a EU investor. Once realized a quick +40% upside in a danish stock only to be slapped with a tax that took all upside away, so trying to not repeat that.

 

For the moment I feel happy mostly holding the common rather than the pref since value realization there might not be as quick and certain as for instance a recent seeking alpha article argues.

 

[kab60]

Seems like the market expects that the incoming cash will be used for M&A. Maybe that requires a discount. And then one probably needs to capitalize corporate expenses, no? Still does look cheap. Setup probably better than it has been in a long time.

[bizaro86]

They definitely can't pay dividends to the common, and probably can't buy it back either, until they restart the pref dividends.

 

I agree buybacks on a road to an eventual liquidation would be the best choice here, and suspect that now that they are cashed up they probably could squeeze  a better price for Mexico/Air Asia assets.

[Cigarbutt]

The interest in this was a liquidating scenario but it seems that Aimia is planning for the long run.

I've done some work on range of values for a "pro-forma" balance sheet after the transfer of Aeroplan assets and liabilities to AC.

 

The equity appears to be negative (my mid-range number lower than last reported) and suspect that this factor only (in the context of their June 2016 suspension announcement) would prevent dividends and repurchases of any kind.

 

 

 

 

[Homestead31]

based on Mittleman's operating history and belief that the NAV is ~$6.38 per share (based on the calcs in his open letter, adjusted for $450M aeroplan price), i think it is highly likely that a repurchase plan to shrink the NAV discount will be in the cards. 

 

if they were to retire all PFDs debt and pension they'd have ~$275M in cash.  They could use $100M of that on buybacks and still have plenty of cushion to consider strategic M&A, while selling off some of the smaller pieces if they just wanted to focus on PLM.

 

if they did pay off all liabilities and did a tender for $100M at $4.50 (probably low, but given stock is at $4.06 right now, not crazy) NAV/share would jump to $7.19 (based on Mittleman's assumptions)

 

from there, a $6 stock price is probably conservative given that holding cos typically trade at a discount to NAV.

 

all of the above is just back of the envelope and there are a million ways to think about it.  from my perspective though,  the right way to think about it is that this is basically cash and disposable assets (that are likely to increase in value) at a large discount, in the hands of capable capital allocators that will want to see the discount to NAV close.  Seems like a pretty simple path to 25-50% upside over the next year or 2, and given that its basically a cash shell with growing assets, the downside should be pretty limited, so it seems like an attractive place to be given where we are in the cycle.

 

[Cigarbutt]

Q3 results have been released this AM. No operational surprise.

Negotiations appear to be underway to complete the previously announced agreement to buy Aeroplan before year-end.

 

-Odds of completing the transaction appear high.

-There is even a possibility that AC extends an offer to buy the whole thing (likelihood?).

-PLM continues to perform strongly and to show potential.

 

It seems that I'm missing something when assessing a component of the transaction. In the initial release, it was mentioned: "The aggregate purchase price consists of $450 million in cash and is on a cash-free, debt-free basis and includes the assumption of approximately $1.9 billion of Aeroplan Miles liability."

 

Even if this is cash-free and debt-free isn't it expected that AC will try (request? require?) to get the residual and "current" deferred revenue (about 900M) to be funded by the seller (discounted to about 500M)?

[Aqul]

Anyone interested at these levels? Risk-reward looks unusually good. Their Chief Strategy Officer hire just departed, which indicates they are looking to unwind the assets rather than turning it into an investment vehicle. I honestly prefer that...

 

We also know that AC will assume negative working capital and underfunded pension liabilities. The negative working capital component might include some of the restricted cash that I am assuming in my SOTP, but the overall impact should be minor. 

[writser]

Anyone interested at these levels? Risk-reward looks unusually good. Their Chief Strategy Officer hire just departed, which indicates they are looking to unwind the assets rather than turning it into an investment vehicle. I honestly prefer that...

 

Interesting, that was the guy they just hired a few months ago, right?

[wabuffo]

...indicates they are looking to unwind the assets rather than turning it into an investment vehicle. I honestly prefer that...

 

Do you have a good handle on exit/wind-down costs if they liquidate?  Air Canada will pick up much of the administrative/customer support staff, but will leave in place much of the very expensively-compensated mid-level and senior level management.

 

Just looking over their financials - there appear to be quite a few one-timers that will add up:

1) they have lease commitments of $67m - perhaps AC will might pick up the call centre lease, but I'm sure they're not picking up the HQ office lease in downtown Mtl or the other satellite office leases around the world.

2) they also have commitments for technology infrastructure of $123m and marketing support of $112m.  From a quick glance, these look like cash costs they are paying every quarter.

3) I'd have to look at the mgmt info circular - but we'll have to factor in executive separation costs as well as stay bonuses for key personnel during the wind-down period.  But a placeholder of $30m-50m might be a good SWAG til those details are released by the company.

4) In pension and other liabilities, it looks like they've booked a dividend accrual for the common dividend they declared but cancelled in mid-2017 of $30.5m.  It makes it sound like this is a cash commitment beyond the unpaid preferred dividend accruals that they will have to pay to shareholders of record at that time before they can make any liquidating distributions to the equity.  So if you bought after June 2017, that cash isn't coming to you but to a shareholder who sold to you.

5) Finally, there's going to be a cash burn while they wind-down.  We'll have to wait and see details on the transition plan to AC, but once the gross billings start flowing to AC, they will have little in the way of incoming cash flows beyond what they get from their investments.

 

You add all of that up and it could be up to $3 per share BEFORE the debt and preferreds make-whole payments.

 

Not saying that there isn't potential upside, but all of the sum-of-the-parts that I've seen on VIC, from Mittleman, etc -- ignore all of these costs/expenses because they assume a quick jump from steady-state A to steady-state B.  I'm worried that it's the transition part in the middle that will bleed quite a bit of cash.  This was not a very cost-conscious culture and had a habit of making expensive commitments and poor capital structure/allocation decisions.  I really worry about the cash expense of dealing with those hidden costs in a liquidation scenario.

 

wabuffo

[Aqul]

...indicates they are looking to unwind the assets rather than turning it into an investment vehicle. I honestly prefer that...

 

Do you have a good handle on exit/wind-down costs if they liquidate?  Air Canada will pick up much of the administrative/customer support staff, but will leave in place much of the very expensively-compensated mid-level and senior level management.

 

Just looking over their financials - there appear to be quite a few one-timers that will add up:

1) they have lease commitments of $67m - perhaps AC will might pick up the call centre lease, but I'm sure they're not picking up the HQ office lease in downtown Mtl or the other satellite office leases around the world.

2) they also have commitments for technology infrastructure of $123m and marketing support of $112m.  From a quick glance, these look like cash costs they are paying every quarter.

3) I'd have to look at the mgmt info circular - but we'll have to factor in executive separation costs as well as stay bonuses for key personnel during the wind-down period.  But a placeholder of $30m-50m might be a good SWAG til those details are released by the company.

4) In pension and other liabilities, it looks like they've booked a dividend accrual for the common dividend they declared but cancelled in mid-2017 of $30.5m.  It makes it sound like this is a cash commitment beyond the unpaid preferred dividend accruals that they will have to pay to shareholders of record at that time before they can make any liquidating distributions to the equity.  So if you bought after June 2017, that cash isn't coming to you but to a shareholder who sold to you.

5) Finally, there's going to be a cash burn while they wind-down.  We'll have to wait and see details on the transition plan to AC, but once the gross billings start flowing to AC, they will have little in the way of incoming cash flows beyond what they get from their investments.

 

You add all of that up and it could be up to $3 per share BEFORE the debt and preferreds make-whole payments.

 

Not saying that there isn't potential upside, but all of the sum-of-the-parts that I've seen on VIC, from Mittleman, etc -- ignore all of these costs/expenses because they assume a quick jump from steady-state A to steady-state B.  I'm worried that it's the transition part in the middle that will bleed quite a bit of cash.  This was not a very cost-conscious culture and had a habit of making expensive commitments and poor capital structure/allocation decisions.  I really worry about the cash expense of dealing with those hidden costs in a liquidation scenario.

 

wabuffo

 

Good points, but I think you are being overly punitive. If PLM is worth 9x 2017 EBITDA, then you have a buffer of ~325mm CAD between the implied value of the equity and the current market cap. It is EXTREMELY unlikely that you will burn that much cash in a liquidation. Most of the operating commitments should leave with Aeroplan off Aimia's balance sheets, but I guess we will need to wait for final confirmation for management. I have already included both the accrued preferred and common dividends in my SOTP.

 

Not to mention, ILS might have positive value if it is sold off.

[NewbieD]

So they repurchased 250m. Looks like your extrapolation from the strategy officer leaving was right, Agul.

 

What's next then - repurchase offer?

[samwise]

Buyback prefs at a discount from the holder who owns 1/3rd of a illiquid issue?

[Aqul]

Retiring the debt was a great move to avoid leakage through interest payments. I guess they need to decide now whether they want to liquidate or deploy their remaining capital. If the latter, it might make sense to keep the preferred in place. I would much rather take the quick return of a liquidation, though.

[Cigarbutt]

Last June 2017, I agreed with management about the dividend cut (both common and preferred) but their CBCA section 42b argument felt fuzzy.

https://www.advisor.ca/columnists_/al-and-mark-rosen/can-a-board-be-legally-forced-to-cut-dividends/

 

Since then, a lot of water has run under the bridge and, because of insufficient confidence in opposing forces and the potential for value destruction, I left money on the table and didn't get to vote last January but progress has been made and, recently, have voted with my feet in the C, B and A sections. Isn't it supposed to be about buying low and selling high? When facts change...

https://www.aimia.com/newsroom/news-releases/

 

There is still uncertainty about liquidation versus a new start and the Canadian preferred market has a life of its own but me thinks that the prefs will continue to gravitate to par but what do I know?

https://www.raymondjames.ca/branches/premium/pdfs/preferredsharesreport.pdf

 

Another interesting feature is that the holders of security of record on June 16th 2017 have some declared and unpaid money to make and it may be a good idea to have a laser eye on accounts as custodians at times "forget" to transfer the old coupons.