AIM.TO - Aimia

[Cigarbutt]

Aimia continues to be, in my view, a liquidation story and the profile has evolved. What may happen can be analyzed through an arbitrage filter.

 

1-How likely is the liquidation and the preferred redemption at par?

I would say the likelihood is high given that the main asset has been sold and it seems to me that AeroMexico should be able to negotiate a fair price for PLM, which is the other jewel in the crown.

 

2-How long will the process take?

Since the Aeroplan sale, Aimia has acted rapidly to alter its stated capital rules, has decided to distribute previously declared dividends (June 2017), has re-started capital distribution, including cumulative dividends, and prominent shareholders have asked for a clear path and have a standstill agreement which finishes on July 1st, 2019.

 

3-Any upside above par value?

Unlikely and limited but a rapid and satisfactory liquidation process may cause them to buy the prefs at a slight premium in order to save on the dividends. 

 

4-What if Aimia doesn't liquidate for whatever reason including an uncertain path to a "new" Aimia?

That is a tough one in part because it is hard to see the outside appetite for the assets remaining within the corporate structure. However, even without a liquidation, IMO downside is limited for the stranded preferreds because of a quite large margin of safety (even if "transition" costs that wabuffo has described are taken into account) if the preferreds are seen as fixed income and because Aimia, as a going concern, would continue to hold valuable tax assets.

 

Here's a slightly dated report that focuses on the common shareholder's perspective:

http://www.mittlemanbrothers.com/wp-content/uploads/2018/11/Value-Investor-Insight-Aimia-10-31-18.pdf

[wabuffo]

I was a little surprised that they paid out the deferred preferred dividends and common dividend without announcing what their business strategy was going to be.  I'm concerned that it just reflects confusion/disagreement by the BOD on the path forward now that the Aeroplan business has been sold.

 

Mittleman appears to be arguing in favor of a conservation of cash while searching for profitable acquisition candidates that can use the NOLs.  But if they were pursuing that strategy, that would argue against making the preferreds current in order to husband all the cash possible towards an asset purchase.  Stranding the preferreds turns them into a PIK/zero coupon type of liability that will grow with time but that one can payoff or restructure further down the road once the business strategy has been fully implemented.

 

Otherwise, if you are going to liquidate, then make the preferreds current and pay them off.  Otherwise, every quarter that goes by, you owe more cash that isn't going into a liquidation.  Overall, this feels like a half-a-loaf strategy that burns cash while delaying the decision about which business strategy is going to be pursued.  Very underwhelming performance by AIMIA's BOD so far.

 

Perhaps we'll learn more this week when 'earnings' are released on the 28th.

 

wabuffo

[samwise]

I was a little surprised that they paid out the deferred preferred dividends and common dividend without announcing what their business strategy was going to be.  I'm concerned that it just reflects confusion/disagreement by the BOD on the path forward now that the Aeroplan business has been sold.

 

Mittleman appears to be arguing in favor of a conservation of cash while searching for profitable acquisition candidates that can use the NOLs.  But if they were pursuing that strategy, that would argue against making the preferreds current in order to husband all the cash possible towards an asset purchase.  Stranding the preferreds turns them into a PIK/zero coupon type of liability that will grow with time but that one can payoff or restructure further down the road once the business strategy has been fully implemented.

 

Otherwise, if you are going to liquidate, then make the preferreds current and pay them off.  Otherwise, every quarter that goes by, you owe more cash that isn't going into a liquidation.  Overall, this feels like a half-a-loaf strategy that burns cash while delaying the decision about which business strategy is going to be pursued.  Very underwhelming performance by AIMIA's BOD so far.

 

Perhaps we'll learn more this week when 'earnings' are released on the 28th.

 

wabuffo

 

Maybe they want to to a tender offer first? I agree that they need to either liquidate fast or invest the cash for a compounded return, while financing with deferred simple interest (i.e. Strand the preferreds). But in either case a buyback will enhance value, and the biggest shareholder has argued for buybacks under a price of 5.

 

If they don't do buybacks now, then paying the dividends out of cash just reduces value over time.

[Cigarbutt]

Aimia has decided not to liquidate.

I don't like the stranded status but the balance sheet of the equation at least gives some comfort for some time.

 

The breakage assumption change at PLM crystallizes past cashflows that have occurred and needed to be recognized which hurts present results but points to a growing and active customer base with strong potential recurring revenues. PLM continues to have value but it has a similar risk profile as the previous AC partnership.

 

The recent announcement has a slight big-bath taste to it which is fair game under the circumstances.

 

I think the common share buyback announcement is reasonable and leaves residual financial flexibility.

 

The new team definitely has a different mindset than the previous team and that comes with its own risk and reward profile.

[wabuffo]

I'm not a big fan of businesses that burn a lot of cash while trying to start up new businesses.  The 'core' business (ex-Aeroplan) appears to have annual outflows of cash = $89m CAD.  While $21m CAD of annual cash interest expense goes away, they have now committed themselves to $17m CAD of preferred dividends.  That pegs go-forward cash burn around $85m per year.

 

I'm still wondering why they made the preferreds current and paid another $30m for a declared-but-no-paid common.  Was it to allow them to buy back stock?  Why in the world would one buy back stock with a near-$100m cash burn and a desire to use cash to make investments? 

 

Not sure I trust this management team to execute well.

 

wabuffo

[Homestead31]

https://seekingalpha.com/article/4251540-laughing-water-capital-issues-open-letter-board-aimia-inc

 

https://seekingalpha.com/article/4251791-laughing-water-capital-issues-second-open-letter-board-aimia-inc

[Cigarbutt]

The Mittleman brothers appear to be the driving force behind the transformation.

Why don't they organize to buy the whole thing as all public listed securities are trading at a discount?

 

Maybe it's a timing issue but there seems to be an opportunity after the buyback.

 

The Mittleman brothers have been involved with Revlon and may have learned a trick or two from Ron Perelman, in terms of dealing with holders of non-controlling securities.

[Uccmal]

Okay, I need some confirmation with this. 

 

In my accounts this morning I received a payment from Aimia. 

 

I last held Aimia shares 2 yrs ago.  I stopped following the saga a long time ago. 

 

So, is this my deferred payment from the shares I held? 

 

Y/N? 

[Cigarbutt]

Okay, I need some confirmation with this. 

 

In my accounts this morning I received a payment from Aimia. 

 

I last held Aimia shares 2 yrs ago.  I stopped following the saga a long time ago. 

 

So, is this my deferred payment from the shares I held? 

 

Y/N?

1-Dividends to be paid to holders of record on June 16, 2017 were suspended after Air Canada caused AIM enterprise value to come down.

2-After the dust settled, Air Canada bought the Aeroplan franchise with a large discount.

3-With cash received, Aimia decided to re-instate capital distribution and to pay the June 16, 2017 dividends and those settled in individual accounts today for many.

4-End of story?

[Uccmal]

Okay, I need some confirmation with this. 

 

In my accounts this morning I received a payment from Aimia. 

 

I last held Aimia shares 2 yrs ago.  I stopped following the saga a long time ago. 

 

So, is this my deferred payment from the shares I held? 

 

Y/N?

1-Dividends to be paid to holders of record on June 16, 2017 were suspended after Air Canada caused AIM enterprise value to come down.

2-After the dust settled, Air Canada bought the Aeroplan franchise with a large discount.

3-With cash received, Aimia decided to re-instate capital distribution and to pay the June 16, 2017 dividends and those settled in individual accounts today for many.

4-End of story?

 

Thankyou. 

 

uhm, I should have said they were the prefs. 

[NewbieD]

So the terms of the buyback of shares have been announced. ~26% of the outstanding shares, assuming a price at the floor of the 3.8 CAD will be bought. Mittleman brothers have announced they will participate so it will be 1/3rd or so of the shares excluding theirs that will be bought assuming a price of 3.80. My guess is the price will be closer to 4.50 than 3.80 since people assumingly hold shares to make money and it's trading today at above 4 CAD.

 

I bought back in on this announcemant at CAD 4. Interesting set-up from a game theoretical perspective. It seems advantageous to wait to decide your action until just before the offer closes unless you believe the offer is so attractive it will fill upp quickly. To be honest I don't know how to tender my shares or if my broker will help even help out. Since Mittlemans have been good stewards so far as I can tell so I'll be happy not to participate and don't mind if the settled price is low since it'll create more value albeit with a slower payout for me.

 

Are there any tax implications of depositing shares in this kind of process?

 

Is this offer just a stepping stone on the path to a liquidation in which the main owners are trying to capture a larger part of the value while the market is uncertain of PLMs value? Or do they really plan to develop PLM long-term?

[SnarkyPuppy]

I'm mobile so don't have time to respond further - but mittleman is NOT participating. 

[NewbieD]

Yes, right. That was implied by my conclusion though missed the word not in one place..

[SnarkyPuppy]

Yes, right. That was implied by my conclusion though missed the word not in one place..

 

My bad- truthfully just saw that statement and stopped reading.  8)

[Cigarbutt]

So the terms of the buyback of shares have been announced. ~26% of the outstanding shares, assuming a price at the floor of the 3.8 CAD will be bought. Mittleman brothers have announced they will participate so it will be 1/3rd or so of the shares excluding theirs that will be bought assuming a price of 3.80. My guess is the price will be closer to 4.50 than 3.80 since people assumingly hold shares to make money and it's trading today at above 4 CAD.

 

I bought back in on this announcemant at CAD 4. Interesting set-up from a game theoretical perspective. 1-It seems advantageous to wait to decide your action until just before the offer closes unless you believe the offer is so attractive it will fill upp quickly. 2-To be honest I don't know how to tender my shares or if my broker will help even help out. Since Mittlemans have been good stewards so far as I can tell so I'll be happy not to participate and don't mind if the settled price is low since it'll create more value albeit with a slower payout for me.

 

3-Are there any tax implications of depositing shares in this kind of process?

 

4-Is this offer just a stepping stone on the path to a liquidation in which the main owners are trying to capture a larger part of the value while the market is uncertain of PLMs value? Or do they really plan to develop PLM long-term?

 

Not a specialist in modified Dutch Auctions but tendered shares in such a process in 2012 (this was the second mod. Dutch Auction the firm was doing in 3 years, using "excess" cash, only to go in distressed liquidation 3 to 4 years later!).

 

1-I understand that this is not on a first come, first served basis; the purchase price is decided at the end and, if extra shares have been tendered, a pro-rata calculation is used.

2-Not sure how it would work for you as a European but, if you want to tender, you would have to tell your broker the number of shares and the option you choose (out of the 3 spelled out) and, if applicable the price at which you would accept tendering. The procedure itself  should be carried out by the broker.

3-If you participate, the shares not purchased will be returned to your accounts.

4-The reasonable course for Aimia, in order to maximize enterprise value since 2017, has been to liquidate, which they have done in a very non-linear fashion and I think that they should continue in that direction but the process may not be linear. Like you say, this has been an "interesting set-up from a game theoretical perspective".

[Cigarbutt]

There continues to be potential closing of the mismatch between value and quoted securities along the capital structure with potential catalysts and the main risk being that the company continues to burn cash during the 'transformation'.

 

The Mittleman brothers' standstill agreement ends in early July and the recent bid for WestJet by Gerry Schwarz-led Onex raises the possibility that the new entity's loyalty unit may involve part or all of Aimia somehow.

 

For PLM valuation purposes, in 2003, Mr. Schwarz had offered a conservative offer for 35% of Aeroplan ("gem") with a 1.2x gross billings and 8x EBITDA parameters. PLM's gross billings for 2019 should be around 260M (USD) and EBITDA should be around 85M (USD). PLM is comparable to Aeroplan but differs in its growth prospects which more than compensate expected declining EBITDA margins. With a slight control premium, Aimia's stake in PLM should be worth between 350 to 450M (CDN).

 

Also, the Cardlytics stake has been going up in value on strong results and wonder if Mr. Mamdani will remain a passive investor.

[wabuffo]

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

 

Aimia buys back a bit less than 23% of its common shares o/s at $4.30 per share.  Stock now trading at $3.73.  Oh well.

 

wabuffo

[Cigarbutt]

I guess the value is in the eye of the beholder (to be holder?)

Mittleman Investment Management bought a significant chunk of shares at 3.85 to 3.86 yesterday.

 

An interesting corollary of the auction process is that a threshold is being defined for privatization.

If too much of a mouthful, the investor who holds 60% of preferred shares could participate in the acquisition in exchange for a post-acquisition dividend.

[movys]

The offering was oversubscribed so I think much of the selling over the past two days are from holders who were involved for the TO, got pro-rated, and are now dumping.

[deseretalts]

Where did you see that Mittleman was adding?

[Cigarbutt]

Where did you see that Mittleman was adding?

See canadianinsider.com

I just saw that they filed today for an additional 500 000 shares bought yesterday at 2.82 (USD).

A million here, a million there, soon we may be talking real money. :)

[samwise]

Here's a slightly dated report that focuses on the common shareholder's perspective:

http://www.mittlemanbrothers.com/wp-content/uploads/2018/11/Value-Investor-Insight-Aimia-10-31-18.pdf

 

This link mentions C$650 million in losses which can be netted against **investment** gains. Another $150 of US NOLs.

 

I'm not familiar with Canadian corporate taxation, but if it's like that for individuals, that means the 650 is only for capital gains generated by buying and selling businesses or securities, not for ongoing business income. I couldn't find any confirmation in Aimia's financials. Anyone has any experience or expertise here?

 

If that's true then it seems like this going to be Mittleman's permanent capital vehicle. They could trade like senvest, permanently at 50% of NAV.

 

If they can compound the cash, they also have the option of not paying the prefs (see DTLA, possibly TOO prefs). Prefs go from being floating rate (cash at 100% of face) to a zero coupon bond ( worth say 40% of face). The prefs are cumulative but not PIK, which would make them compound. There seems to be some tax implications they mention in their latest quarterly. Is the tax still payable if they don't pay the pref dividend? Any credit experts and tax experts who can opine on this?

 

Biggest risk now is that they are forced to agree with some value destroying plan as they have to vote with management at the next AGM.

 

Next risk is they force out minorities for cheap. ( Again see TOO).

 

Then the risk is that they screw up the investments.(recent performance isn't great)

 

Finally, the market always keep them at a discount (senvest)

 

I think they could create value by just investing in an S&P etf and turning off the prefs. Get compounding value , but pay simple interest once at the end. Same idea as an RRSP. The more leverage you get from the prefs, the better the percentage returns for the equity.

 

So even more buybacks would make sense here. Extreme case AIM are investing borrowed money and none of their own. I don't think the prefs are protected from that possibility.

 

Management has to just stop giving money away as they just did with HSBC.

[NewbieD]

Here's a slightly dated report that focuses on the common shareholder's perspective:

http://www.mittlemanbrothers.com/wp-content/uploads/2018/11/Value-Investor-Insight-Aimia-10-31-18.pdf

 

This link mentions C$650 million in losses which can be netted against **investment** gains. Another $150 of US NOLs.

 

 

If they can compound the cash, they also have the option of not paying the prefs (see DTLA, possibly TOO prefs). Prefs go from being floating rate (cash at 100% of face) to a zero coupon bond ( worth say 40% of face).

 

...[]...

 

I think they could create value by just investing in an S&P etf and turning off the prefs. Get compounding value , but pay simple interest once at the end. Same idea as an RRSP. The more leverage you get from the prefs, the better the percentage returns for the equity.

 

 

No knowledge on the tax loss rules. On the surface this pref idea seems like a good route. That is if you don't care about screwing part of your capital structure. Do you think they'd be comfortable with this given possible long term implications to themselves raising money? What happened in the cases you mention? Guess you write about S&P as a thought experiment, don't think any activist investor would go for that:)

 

Regarding investments. AIM has formed an investment commitee. The plan from mgmt seems clear - to grow through M&A in the loyalty business. At least they put some profitability criteria in.

 

Agree that more buybacks seems sensible unless they find something truly cheap to buy. But it will make it take a long time to use the tax credits, so not sure how agressive they will go with this.

 

Selling the Cardlytics stake and buyback or buy something yielding profits would make sense unless they believe it's clearly undervalued.

 

Does Mittleman have any record of exploiting minorities?

[Cigarbutt]

1-income tax paid on preferred dividends showing how present capital structure is inefficient

The idea behind Part VI.1 tax is the expectation by tax authorities that dividends are paid with after-tax profits. Since profitability for the operating entity is theoretical and future-looking, when dividends will be paid on preferred shares, tax will be paid and will be carried forward as non-capital losses for up to seven years, to be used against operating taxable income. What remains to be explained is the 40% rate. I understand that the basic rate is 25% but firms can elect for the 40% rate. Since this is equivalent to paying tax in advance, this would only make some sense if a rapid and significant return to operating profitability is achieved and even then. Using the 40% rate now only seems to make sense from the point of view of the dividend payee who is a corporation and then does not have to pay an extra 10% upon reception of the dividend. Given the present capital structure based on a large amount of preferred shares as equity, the unfavorable tax treatment and the uncertain outlook for return to operating profitability, I think the stranded status has less value for common shareholders (and the Board).

 

2-Mittleman Investment Management involvement and what it may mean for capital structure

There are risks that the firm somehow muddles through some kind of transition and value in the capital structure may end up dissipated or channelled. I think the Mittleman brothers will play a significant role and would say it's unlikely that they exploit minorities or the stranded scenario. Aimia will tend to look like a holding of investments and, from a humble perspective, the preferred share prominent position in the equity would be very unusual (and tax inefficient, see above) for such a vehicle. The performance at the investment management firm has been relatively poor in the last few years but they are basically patient contrarian value guys who typically try to make money from intrinsic value discrepancies. They have not so far been involved in controlling stakes with implied control premiums but Aimia is a different story. I would say that the Mittleman people have been too optimistic with Aimia but their appraisal is still well above where the market is marking the value at this point. In the past, thay have been involved on the minority side and, for instance, have voiced concerns about the potential predatory behavior of Ron Perelman with Revlon. Unlike the DTLA and the TOO scenarios where actors would actually take advantage of situations thay have contributed in creating, I think the Mittleman firm is likely to play the game fairly to promote value realization.

 

I guess we'll just have to see and the next few weeks may provide some answers.

[samwise]

 

No knowledge on the tax loss rules. On the surface this pref idea seems like a good route. That is if you don't care about screwing part of your capital structure. Do you think they'd be comfortable with this given possible long term implications to themselves raising money? What happened in the cases you mention? Guess you write about S&P as a thought experiment, don't think any activist investor would go for that:)

.

 

Does Mittleman have any record of exploiting minorities?

 

I am not sure if Mittleman has ever had the opportunity or temptation to exploit minority shareholders or separate layers of capital structure. I do know it would weaken their moral position against Perelman in Revlon ( rhetorical question: is the moral high ground a good defence against a shark?).

 

Long term implications for BAM have been nil, AFAIK. They sell returns to their LPs not manners.

 

I don't expect them to buy ETFs, but it would eliminate stock selection risks from the evaluation. Seems a safer option than more Revlon and AMC.