AIM.TO - Aimia

[Pref User]

I think you have to consider that Cardlytics was sold to raise cash because of a chain of events by management AND Mittleman. Think about the $80M left on the table as the yield on doing the tender offer at $4.50. Had management who knew they had a cash-burning business decided to keep the cash instead of trying to close a discount gap that is not concrete and all based on what PLM is sold for, Cardltyics is probably not sold then to shore up cash for the balance. So if you look back the real dumb move in hindsight was not selling Cardlytics early it was the bought deal that added no value to shareholders. In fact, the discount gap has gotten wider. Again, I know it is hindsight but using the current share price and adding the money left on the table with Cardlytics the bought deal has a negative yield of -68.75% (110/162).

 

What we should all be concerned with are managements and Mittleman's capital allocation skills. 

[wabuffo]

Agreed - mgmt is confused and erratic (and driving a clown car).

 

they rushed to:

- make the preferreds current,

- so that they can do a tender at above the market prices, which

- led to a second repurchase effort after the first failed to produce the desired effect,

- which left them short of cash while they continue to incinerate more....

 

this made them forced sellers of CDLX.  I have no idea of how to value CDLX (and apparently neither does AIM mgmt) - but I can't help but think that this was furniture-burning

 

My worry is that this pattern repeats with PLM.

 

wabuffo

[movys]

Agreed - mgmt is confused and erratic (and driving a clown car).

 

they rushed to:

- make the preferreds current,

- so that they can do a tender at above the market prices, which

- led to a second repurchase effort after the first failed to produce the desired effect,

- which left them short of cash while they continue to incinerate more....

 

this made them forced sellers of CDLX.  I have no idea of how to value CDLX (and apparently neither does AIM mgmt) - but I can't help but think that this was furniture-burning

 

My worry is that this pattern repeats with PLM.

 

wabuffo

 

That last worry would be of more concern if you thought mgmt would survive the vote in a couple months.  I don't see how they can.  Extracting value thoughtfully from PLM requires some care and may not be a layup, but winding down money losing businesses is a no-brainer and will be done in short order after the vote. 

[Pref User]

I don't know if winding down ILS makes sense now. I know it is only one-quarter of positive results, but next year a huge chunk of IT costs are coming out of the business and I actually have ILS slightly positive cash, not significant but still positive cash. I wouldn't bet against the management on getting ILS positive now after the current execution, especially after reexamining their compensation. Rabe only gets paid if the sum of EBITDA is positive over his three years from ILS, and we all know he wants to get paid, so I wouldn't rule it out.

 

I know ILS has been losing money for years, but management didn't have any incentive in the past to improve it because Aeroplan was doing well. But if ILS is slightly positive cash flow why get rid of it? It helps eat up costs and without ILS Aimia is still negative cash flow because of the preferred shares and the tax Aimia has to pay for paying preferred shares when it is not making taxable income, PLM's dividend is covering that expense this year but PLM gave a one-time large payout. Unless that one-time payout becomes regular a slightly positive ILS would be good for Aimia.

 

As for management staying in power, the one thing I would say to look out for is the PH&N fund striking a deal with Aimia that pays in full the preferred shares in common stock with the condition that RH&N votes for management. PH&N gets the much-needed liquidity and a boost to its returns for this year, which have been a disaster and given away 90% of their outperformance since inception. Management could justify it to shareholders because it removes the cash burn from preferred shares and isn't a significant hit to the NAV.  Throw in Mittleman's decreased stake and I get that management carries the day at the new vote by a very slim margin. Not sure it will happen but something to consider. 

[Cigarbutt]

...

As for management staying in power, the one thing I would say to look out for is the PH&N fund striking a deal with Aimia that pays in full the preferred shares in common stock with the condition that RH&N votes for management. PH&N gets the much-needed liquidity and a boost to its returns for this year, which have been a disaster and given away 90% of their outperformance since inception. Management could justify it to shareholders because it removes the cash burn from preferred shares and isn't a significant hit to the NAV.  Throw in Mittleman's decreased stake and I get that management carries the day at the new vote by a very slim margin. Not sure it will happen but something to consider.

I'm getting more and more confused and wonder who may be the sharpest tool in the bozo shed.

Isn't it ironic that the capital that was labeled as 'stranded' may become risk capital, by invitation only?

I would say the now embedded and implicit conversion value is net positive and it may be interesting to see how 'fair value' is determined and the impact on NAV.

It looks like fair value, in this specific scenario, would be much lower than during buyback plans, not even considering where Mittleman thinks it is.

Usually dilution is not well received from existing shareholders but the issue may become institutional.

I've followed a lot of recaps but this kind of twist would be a first: some kind of a white knight status tagged with a premium, in a company loaded with cash on the asset side and no 'real' debt. The intuitive value of preferreds may evolve, at least the perception of it. The truncated capital structure may have something to do with it.

 

In 2009, the Treasury came up with a plan to attract private investors to invest in the banks' toxic assets. It was discovered that a significant kicker had to be included with the deal and the plan fell apart because politicians were worried that the process would be called a bail-out. So they did something else. LOL. A bail-out is a bail-out and it does not matter if people figure out after that it wasn't.

 

In 1588, it was felt the Invincible Spanish Armada was just too strong but the best way to fight for the British was to wait for, weather obliging, an opportunity and eventually this meant not much fighting at all. Liquidation remains the best option but, short of that, the next few weeks could be (really) entertaining.

[wabuffo]

Aimia capitulates - BOD will resign by Feb, 2020 and activist lawsuits will be withdrawn.  I guess Rabe keeps his job - its unclear from the press release.

 

In addition, more cowbell!

https://www.newswire.ca/news-releases/aimia-announces-concurrent-substantial-issuer-bids-for-common-and-preferred-shares-for-aggregate-purchase-price-of-up-to-125-million-817970318.html

 

The tender for $62.5m of preferreds is interesting. Weird tender price - at or slightly below market.  Both sides were talking to Mamdani in order to get his support of their respective position.  Looks like he supported the activists in return for the preferred buyback.

 

I'm just confused as ever with this clown show.

 

wabuffo

[movys]

Aimia capitulates - BOD will resign by Feb, 2020 and activist lawsuits will be withdrawn.  I guess Rabe keeps his job - its unclear from the press release.

 

In addition, more cowbell!

https://www.newswire.ca/news-releases/aimia-announces-concurrent-substantial-issuer-bids-for-common-and-preferred-shares-for-aggregate-purchase-price-of-up-to-125-million-817970318.html

 

The tender for $62.5m of preferreds is interesting. Weird tender price - at or slightly below market.  Both sides were talking to Mamdani in order to get his support of their respective position.  Looks like he supported the activists in return for the preferred buyback.

 

I'm just confused as ever with this clown show.

 

wabuffo

 

Current mgmt will remain in their roles until the board is reconstituted in Feb.  After that, the board is free to replace any officers it wishes to replace.  There will be no golden parachutes or generous severance agreements put in place in the interim.  Further, mgmt may not consummate any material transactions without the approval of Mittleman.

 

It is also no accident that the expiration for the Preferred SIB is different from that of the Common SIB.  If the preferred SIB is not fully subscribed, you can expect Aimia to increase the size of the common SIB.  This is a total victory for the activists.  Mittleman will take control of the company in 90 days, return some capital to shareholders at a modest premium, and put an end to the cash incineration.

 

Previously, there was substantial uncertainty the gap to NAV would close, coupled with the fact that NAV was slowly shrinking.  Now, there is substantial certainty the gap to NAV will close, and NAV is likely to increase.  Shares should be materially higher today, though I'm not surprised by the muted reaction, given the large retail component and the large number of shareholders just involved for the special meeting catalyst.

 

[bizaro86]

Is there a risk mittleman converts this into a vehicle for his own investing? If he does that I would expect a relatively significant discount to NAV...

[Homestead31]

i wouldn't be surprised if they owned some common stocks, but in order to take advantage of the tax assets they're going to want some operating companies i would think... but i guess we'll see

[wabuffo]

It is also no accident that the expiration for the Preferred SIB is different from that of the Common SIB. 

 

It's also probably no accident that the SIB is concluded right at year-end at a price ($4.25 per share) that we haven't seen for much of 2019.  The fact that the activists get a favorable year-end mark is just a fortuitous accident.

 

This is a total victory for the activists.

 

We'll see - for now it appears the hounds have caught the car that they've been chasing.  I'm surprised at the buyback - they keep buying high (AIM buybacks) and selling low (CDLX).  I continue to be agnostic but as a hodler, I do wish the activists luck.

 

wabuffo

[Cigarbutt]

Is there a risk mittleman converts this into a vehicle for his own investing? If he does that I would expect a relatively significant discount to NAV...

The thesis here needs to take into account that Aimia would morph into an entity that would be considered a perpetual SPAC with a hope that a smaller discount to NAV could be achieved.

 

[Pref User]

Pulling out a calendar there is not much of a difference in the days for the SIB, the 27th is a friday and the 30th is a monday. So the SIB gets 2 extra days, how much more do you think is going to actually be offered in those days even if they don't use up all of the preferred share SIB. 

 

I think PH&N fund will fill the preferred share SIB no problem. They've been searching for a liquidity event for a year now and they finally got it, the SIB price is above their cost, throw in the dividend and they didn't do to bad for a little over a one year hold on some of their money. 

[wabuffo]

would be considered a perpetual SPAC

 

How does that not become a PFIC in the IRS's eyes?

 

I think PH&N fund will fill the preferred share SIB no problem.

 

I agree - this preferred SIB was designed by and for Mamdani. 

 

wabuffo

 

[Pref User]

Could they delist and move Aimia to the US to avoid PFIC?

 

And would that mean keeping ILS if its making a little money is in Mittleman's best interest to avoid being a PFIC?

[Homestead31]

"It's also probably no accident that the SIB is concluded right at year-end at a price ($4.25 per share) that we haven't seen for much of 2019.  The fact that the activists get a favorable year-end mark is just a fortuitous accident."

 

If they really wanted a year end mark they would have said it expired on the 31st, not the 30th... the market is open on the 31st, so shares will not end the year on the SIB price.

 

As for PFIC, tied to what i said earlier about maybe owning some common stocks, they need operating income to avoid PFIC status, so its not like they'll just buy all common stocks.

[Pref User]

So does that mean the for the PFIC they'll need to keep ILS? Just wondering because PLM's dividend as their only income from my understanding would make them a PFIC.

[wabuffo]

Aimia submitted some sum-of-the-parts valuation work from Alexander Capital as part of the offering memorandum.  I'm attaching the pdf to this post and encourage all of the AIMIA bulls to cop a squint at it.  Its not the $8-$10 valuation that everyone is hoping for.  In addition, there are several parts where I think Alexander Capital took the most optimistic scenario vs what I would do.  So with that as an intro here's my sum-of-the-parts using the Alexander Capital work.

 

I made two minor changes:

1) Alexander Capital used mgmt's estimate of long-term SG&A = $13m and slapped a multiple on it.  AIMIA is currently running at $25m.  I don't have confidence in mgmt's forecast - so I'll use $20m (and use the same multiples).

2) The preferreds were valued at market.  But in a liquidation, I think its unlikely that AIMIA will be able to continue to buy out at market.  We'll get more info after the preferred SIB (though I still believe its a liquidity event for Mamdani to reduce his stake).  I'm going to use par value.

3) Other than that, I will accept Alexander Capital's valuation estimates for PLM, Big Loyalty and ILS (though I suspect folks here will be disappointed in the PLM valuation).

 

Bottom line - mid-point of valuation estimate is around $4.40 per share (not much above the SIB price).

 

As always, criticisms and critiques welcome. 

 

wabuffo

 

AIM_Valuation_Alexander_Capital.pdf

[Pref User]

I agree with your adjustments. I would add an additional one for ILS. Reading the report there is a lot of "IF" and execution that needs to happen over the next 3 years which might not happen under new management. If Mittleman comes in and shuts down ILS (which was discussed in the wrongful dismissal lawsuit) then there is a significant swing in value. Shutting down ILS would require severance and paying off liabilities related to ILS, quick estimate that could be $50M-$70M, which translates to a $75M-$100M swing in value or $0.69/share - $092/share. Taking the valuation range down too $3.22 - $4.00, making the new midpoint $3.61.

 

 

Also isn't this report a huge liability for Aimia now with regards to PLM? An independent valuation expert that Aimia signed off on to do their SIB came back with a valuation that is below Mittlemans. Aeromexico could easily use this document against Aimia when negotiating any future buyout. 

[wabuffo]

...isn't this report a huge liability for Aimia now with regards to PLM?An independent valuation expert that Aimia signed off on to do their SIB came back with a valuation that is below Mittlemans.

 

I mean...because it's Mittleman?  Their credibility left town a long time ago. 

 

wabuffo

[Dr. Aybolit]

The Alexander Capital report appears to make a glaring mistake with regard to its valuation of PLM, and thus Aimia. 

 

On the top of page 13, it states: "Alexander Capital considered FRL to be a financial obligation for the purposes of deriving equity value from enterprise value."

 

I cannot find any precedent for doing so.  The FRL recycles and grows as long as the business is a going concern.  It is a negative working capital benefit which is never charged against enterprise value as far as I can tell.  When airlines buy other airlines they don't add the FRL of the acquired entity's loyalty program to their consideration of enterprise value.

 

And while the FRL for PLM does not appear to be explicitly mentioned in the Alexander Capital report, one can infer, based on gross billings and in comparison to other such firms, that it should be no less than US$200M.  So that is CAD 263M (at the 1.3167 FX rate used in the report) that needs to be added back to their valuation of PLM, which is C$2.43 per Aimia share on 108.544M shares.  That is a huge difference.  Add C$2.43 to Alexander Capital's C$5.10 to C$6.25 outcome range and it becomes C$7.53 to C$8.68, all else being kept the same.

 

they also applied a 10% discount on PLM due lack of liquidity and lack of total control.  But Aimia has joint control, and joint control is actually worth some portion of a control premium to the buyer who would like full control, and the ability to do with the substantial FCF anything it wants.  So even if no control premium is added, but just removing the erroneous discount, that is further upside to the range of values they produced.

 

i understand being conservative, which is fine, but not at the cost of being incorrect.  PLM has a 30%+ EBITDA margin and generates unlevered FCF of US$60M per year that has grown at a double digit rate for nearly 10 years and is seemingly recession-proof. 

 

in late 1997 Warren Buffett paid $585M for International Dairy Queen (INDQA), 9.75x EBITDA of $60M (15% EBITDA margin), and 16.5x $35M in FCF, when the UST 10-yr was over 6%.

 

obviously apples and oranges, to say the least, but then again, this is the corner of Berkshire and Fairfax...

 

Happy Thanksgiving to all...

 

[wabuffo]

Great first post - and welcome to the Aimia debates, Doctor A!

 

And while the FRL for PLM does not appear to be explicitly mentioned in the Alexander Capital report, one can infer, based on gross billings and in comparison to other such firms, that it should be no less than US$200M.  So that is CAD 263M

 

Alexander Capital appears to deduct FRL.  In their DCF and Past Precedents valuation methods they deduct $73m USD that they label "Net Obligations".  To me, this appears to be a terminal value for FRL discounted to the present. 

 

If one feels, that is really pseudo-permanent equity, then adding it back would be worth $35MM USD (for Aimia's share).  That represents 42-cents CAD per share. Its really not that huge an adjustment. 

 

If this report is so error-ridden, why do you think Aimia (and its BOD - which includes Mittleman) decided to publish it?  It definitely weakens their hand in negotiations with AeroMexico.  This is an unforced error, no?  If one believes PLM has a higher value.

 

wabuffo

[Dr. Aybolit]

thanks.  i've been reading various postings on COBF for many years and finally decided to join in. very high quality group.  my main hope is to not get kicked out.

 

it is strange that the Alexander Capital report would leave us guessing about such critical inputs, but my take was that in improperly deducting the FRL, let's use my US$200M guesstimate, they did so against what would have to be a US$127M cash position, thus arriving at a net negative US$73M. 

 

regardless, i don't think a fairness opinion, however well done or flawed, obligates or pressures a shareholder to vote in favor of any transaction that they deem to be inadequately valued.  So a buyer can cite it up and down the street, if the seller knows better, they can just vote no.

 

but your point is well taken, why did they commission and publish such a sloppy fairness report?  I have no idea.  hopefully the new board will have higher standards. 

[Cigarbutt]

The Alexander Capital report appears to make a glaring mistake with regard to its valuation of PLM, and thus Aimia. 

...

Welcome Dr. Aybolit but I don't really agree with your assessment. :)

 

The valuation report is questionable from many angles but the cynic in me suggests that management obtained the valuations that they wanted. ::)

 

1-The control and liquidity aspect

For the control part, Aimia feels that it may deserve a premium and the airline, as the anchor partner in the driver's seat, feels that they deserve a discount, so this may end up a wash IMO. For the liquidity part, Aimia just announced that they will squeeze the par value on a component of equity holders so they should not be surprised if 'partners' behave the same way.

 

2-The 73M net obligations part

If your redemption liability assumption holds, the purchase price paid by Air Canada (450M) makes no sense and should have been a multiple of that. The purchase price was this low (in the end) because AC had to assume a disproportionate amount of liabilities versus the underlying cashflow generating entity. Redemption liabilities can be discounted but not to zero, especially when a change of control is contemplated. When loyalty units are valued and transacted, this aspect is not necessarily discussed or explicitly stated and may be incorporated into a standard EV to EBITDA measure but IMO it needs to be taken into account. FWIW, I agree with their PLM valuation (range for a transaction with Aeromexico) and, in my calculations, a discounted liability amount was allocated for the necessary build-up of capital in correlation to growing redemption liabilities and gross billings.

I have a table with numbers but to summarize and taking the template of results from 2012 to 2019 and using the growth assumptions described until 2030, here are the inputs: in 2030, GB should be up by a factor of about 1.2, an expected ratio of total liabilities (as a proxy for redemption liabilities) to GB is maintained at about 1.4 to 1.5 and an expected ratio of total liabilities to total assets (as a proxy for 'float' maintained on the asset side) is maintained at around 1.4. Their valuation multiple is based on EBITDA and not free cashflow and IMO adjusting for the EBITDA cashflows going to the proportional float build-up can be justified. With these inputs, I did not exactly land on the discounted 73M USD but slightly fudging the numbers allowed to reach the exact amount (!).

-----

The roster of actors was always a concern and recent developments have not helped. One thing I find concerning about the report is that the rationale behind the common buyback, using a conservative appraisal of underlying assets, only makes sense if the liquidity oppression is maintained and if faith is allocated to what is coming next. The margin of safety continues to dwindle.

 

Edit: To be clear, "by a factor of about 1.2", I meant up by about 120%.

[Dr. Aybolit]

Thanks for your comments Cigarbutt.  Your cynicism is probably right in that paid valuation reports are often outcome-driven; the board gets the result that they paid for.  But I struggle to imagine why they would want a low valuation for their common in this circumstance.  Then again, I have been baffled by much that comes out of Aimia’s board for a very long time.

 

But I continue to disagree that an illiquidity discount is warranted, or that the points liability should be considered in a going-concern valuation.  I rely on what I can observe as having transpired in the public and private markets over the past 20 years for these businesses, which I think should outweigh your more subjective argument for what “needs to be taken into account,” no matter how elegantly theorized. 

 

To agree with the PLM valuation range offered by Alexander Capital would be to agree that a buyer in that range deserves the outstanding return such a purchase price would provide, a 9% FCF yield (unlevered) at the mid-point, versus 3.25% 10-yr gov’t paper in Mexico, a 3.15% dividend yield on Mexican stocks in general, and a 5.2% FCF yield on Mexican stocks in general.  The FCF conversion at PLM is immense, the growth has been double-digit, and it’s apparently recession-proof, and the most relevant comps (ignoring the highly coerced Aeroplan fire-sale, Velocity and LifeMiles are the best comps) argue for at least a 10x EBITDA multiple.

 

Re: the control and liquidity aspect.  It appears we agree that the control premium vs. discount is a wash.  But you seem to be saying that maybe there is some validity to a liquidity discount, if only as karmic retribution for Aimia having offered preferred shareholders a discount to par in the recently announced SIB.  Now I get that’s said with tongue in cheek, but in seriousness I don’t think that the SIB can be characterized as a “squeeze” given its voluntary nature, so let’s not penalize them on moral grounds. 

 

Anyway, rather than ruminate on what might be deserved, let’s look at what is observable.  In a very recent and highly comparable situation Affinity Equity Partners was not discernibly penalized for the illiquidity nor lack of control of their 35% stake in Velocity (which did A$411M gross billings and A$134M EBITDA in TTM 6/30/19) that they just sold back to Virgin Australia for A$700M (11x EBITDA, or 16x if one considers the points liability a charge to enterprise value, which again, I've never seen done before), affording them something like a 3.5x return (with substantial cash dividends) on their original investment made 5 years earlier, when they paid A$335M for that 35% stake (EV A$960M, 10x EBITDA).  So in at least one highly comparable and recent transaction of significant size, an illiquidity or lack of control discount was nowhere to be found.  Strangely, the Alexander Capital report, despite going back to 2013 for precedent transactions, omitted the 2014 buy by Affinity Equity Partners of that 35% stake in Velocity for 10x EBITDA.

 

An even more inexcusable omission from the Alexander Capital report was the 2015 transaction in which Advent International bought 30% of LifeMiles (Avianca Airline’s version of PLM) for $344M in Aug. 2015 (an EV of $1.15B, about 10x EBITDA, when LifeMiles had just over 6M members, and $282M in gross billings (2014) around what PLM has now).  Was their omission of this unquestionably comparable transaction an oversight?  If so, it is a stunning miss.

 

In 2017, 2018, and 2019 the company (LifeMiles) which had no prior debt borrowed $495M (at 6.50% to 7.50%) in total to pay dividends, with Advent getting 30% of that, or $149M.  LifeMiles has since paid down the loan to $413M.  And while LifeMiles keeps 6 months worth of rewards payments in cash reserves, I don't know if they do so by mandate from bank partners or just their own sense of prudence.  My point is, if you can leverage these entities in such a way, clearly the lending banks are also not calculating the points liability into their leverage ratio for lending. 

 

And LifeMiles has a relatively sickly partner in Avianca, which is in the process of getting bailed out financially.  Aeromexico is 49% owned by Delta, and in much better shape.  If LifeMiles could take out $495M in loans for dividends, I bet PLM could take out $300M, which would be US$147M (C$194M) for Aimia, a huge chunk of cash that Aimia could access without selling their 49% stake.  Given the relentless and growing FCF at PLM, which seems impervious to recession and even the bankruptcy of the anchor airline partner, what better candidate for a leveraged recap to facilitate a special dividend payout?  That’s probably a better idea than Aimia selling PLM for both Aeromexico (who doesn't have the money really to pay Aimia a fair price (without help from Delta) and for Aimia (given they probably get designated a PFIC without the PLM stake).

 

Also, your assumption that there must be a certain ratio maintained of float to the points liability may be valid but maybe too rigid here, as this is not like the insurance business where regulation requires certain capital ratios be maintained, which is part of the beauty of these businesses.  And while sometimes there are minimums for cash reserves mandated by the card issuing bank partners or lenders, they are usually at pretty low levels, which is what allowed Aeroplan to get itself into trouble by paying out almost all of their FCF even as their points liability grew (exacerbated by having allowed Air Canada to sell its stake in Aimia/Aeroplan in 2008, creating an unnatural and untenable conflict of interest that should have resulted in building reserves). 

 

Lastly, the credit rating agencies don’t count the points liability as leverage, so that’s another important perspective to consider.

 

Anyway, maybe I’m just a country doctor who wistfully wonders what life would have been like as an investment banker, but I’ve read a lot about this unusual niche in the investment landscape so I really think that I’m looking at it in the right way.

 

And now I’m off to an entirely less worthwhile argument that is undoubtedly already brewing as the extended family comes over for Thanksgiving.  God give me strength… 

 

Happy Thanksgiving to all. 

 

- Dr. Aybolit

 

[Cigarbutt]

...

Re: the control and liquidity aspect.  It appears we agree that the control premium vs. discount is a wash.  But you seem to be saying that maybe there is some validity to a liquidity discount, if only as karmic retribution for Aimia having offered preferred shareholders a discount to par in the recently announced SIB.  Now I get that’s said with tongue in cheek, but in seriousness I don’t think that the SIB can be characterized as a “squeeze” given its voluntary nature, so let’s not penalize them on moral grounds. 

 

Anyway, rather than ruminate on what might be deserved, let’s look at what is observable...

 

An even more inexcusable omission from the Alexander Capital report was the 2015 transaction in which Advent International bought 30% of LifeMiles (Avianca Airline’s version of PLM) for $344M in Aug. 2015 (an EV of $1.15B, about 10x EBITDA, when LifeMiles had just over 6M members, and $282M in gross billings (2014) around what PLM has now).  Was their omission of this unquestionably comparable transaction an oversight?  If so, it is a stunning miss.

 

In 2017, 2018, and 2019 the company (LifeMiles) which had no prior debt borrowed $495M (at 6.50% to 7.50%) in total to pay dividends, with Advent getting 30% of that, or $149M.  LifeMiles has since paid down the loan to $413M.  And while LifeMiles keeps 6 months worth of rewards payments in cash reserves, I don't know if they do so by mandate from bank partners or just their own sense of prudence.  My point is, if you can leverage these entities in such a way, clearly the lending banks are also not calculating the points liability into their leverage ratio for lending. 

 

And LifeMiles has a relatively sickly partner in Avianca, which is in the process of getting bailed out financially.  Aeromexico is 49% owned by Delta, and in much better shape.  If LifeMiles could take out $495M in loans for dividends, I bet PLM could take out $300M, which would be US$147M (C$194M) for Aimia, a huge chunk of cash that Aimia could access without selling their 49% stake.  Given the relentless and growing FCF at PLM, which seems impervious to recession and even the bankruptcy of the anchor airline partner, what better candidate for a leveraged recap to facilitate a special dividend payout?  That’s probably a better idea than Aimia selling PLM for both Aeromexico (who doesn't have the money really to pay Aimia a fair price (without help from Delta) and for Aimia (given they probably get designated a PFIC without the PLM stake).

 

Also, your assumption that there must be a certain ratio maintained of float to the points liability may be valid but maybe too rigid here, as this is not like the insurance business where regulation requires certain capital ratios be maintained, which is part of the beauty of these businesses.  And while sometimes there are minimums for cash reserves mandated by the card issuing bank partners or lenders, they are usually at pretty low levels, which is what allowed Aeroplan to get itself into trouble by paying out almost all of their FCF even as their points liability grew (exacerbated by having allowed Air Canada to sell its stake in Aimia/Aeroplan in 2008, creating an unnatural and untenable conflict of interest that should have resulted in building reserves). 

 

Lastly, the credit rating agencies don’t count the points liability as leverage, so that’s another important perspective to consider.

 

Anyway, maybe I’m just a country doctor who wistfully wonders what life would have been like as an investment banker, but I’ve read a lot about this unusual niche in the investment landscape so I really think that I’m looking at it in the right way.

...

- Dr. Aybolit

Nice reply.

 

The LifeMiles example is instructive. But then why is it that Aimia hasn't been able to team up with AeroMexico somehow to realize (or monetize) the value? Did you know that Mr. Jeremy Rabe was intimately involved in the transformation of LifeMiles in 2015 as he was a 'partner' at Advent?

 

Out there in the real world of FFPs and loyalty programs, there seem to be two worlds. One that includes Velocity and LifeMiles where partners work together to maximize value and harvest gains and where assets are sold at premiums to reported value and another one that includes Multiplus and Smiles where partners argue, fight and likely dissipate value and where assets are sold at discounts to reported value. Where does PLM belong? And Aimia? And what can retail investors do about it? You can convince me but that won't likely change the outcome.

 

I hadn't looked really at LifeMiles' financials and what you describe (leverage to dividend) is very interesting and also occurred, to some degree, at Velocity. I agree with most of your numbers although I'm not sure about the outstanding debt (some of it is ring fenced and amortizing) and additional debt has been incurred in Q1-Q3 2019 (100M). Also, I don't come to the same dividends taken out by the 30% minority interest holder: 218.35M + another 30M in 2019. The high dividend pattern is also similar to Velocity. Looking at various sources (internal and external), LifeMiles has indeed built significant leverage and has covenants in its credit agreement that stipulates, among others, a "total leverage ratio" of 4.50 for a year and then 4.00 thereafter which I assume corresponds to TD/TA. The credit agreement and rating agencies do seem to take into account the redemption liabilities in their calculations. Below is a summary of data to compare PLM and LifeMiles, in terms of the potential leverage that PLM could accomplish:

 

                                  2015            2016            2017            2018            Q1-Q3 2019

TD/TA LifeMiles              0.9              0.9              2.2              3.5                  3.5

TD/TA PLM                    1.5              1.5              1.3              1.3                    ?

 

From 2019 ratings disclosure, it seems that LifeMiles has reached maximum leverage but, if used as a 'template', PLM's leverage (it has no debt now) could be significantly increased and the potential dividends from such leverage could reach even higher levels than what you describe. I'm not saying it's the right thing to do but it's been done and why isn't PLM doing it?

 

This is really a tale of two loyalties: It is the best of times, it is the worst of times, it is the age of wisdom, it is the age of foolishness. This was supposed to be easy and it isn't, why?