AIM.TO - Aimia

[Pref User]

The LifeMiles comparison doesn't make sense to me if anything it weakens your argument.  Just doing a little research you can see that Lifemiles has a world of issues, the airline attached to it is almost in bankruptcy, I get that there is a bailout plan. It appears they did the leverage capitalization for Lifemiles to get cash to the parent company that needed it. PLM doing a leveraged dividend doesn't make sense to me because it is pulling forward future value, that could be hampered by interest payments and covenants. The debt wouldn't come cheap either, I would say it would be close to Aeromexico's who is BB-. As well Aeromexico has come out and said they won't renew the agreement with PLM in 2030, I know this is a negotiating tactic, but if I'm a lender why would I give you money if in 10 years there is no way to know what your business will look like and if you will have the capabilities to repay my debt. So that's something overhanging on your leveraged dividend idea. LifeMiles has also been downgraded to a B rating.

 

For your liquidity discount once again Lifemiles ruins your own point. Advent International hired Morgan Stanley 19 months ago to shop their stake for a sale, and as far as I can see there were no buyers. I think that signals your liquidity issue right there. Going back to the point above about Aeromexico not wanting to renew the partnership after 2030, which I would argue hampers liquidity and makes Aeromexico the only true buyer. Any other buyer would need to come in and buy Aimia out and negotiate to sign an extension to the agreement, making a deal harder, which drys up liquidity. 

[Dr. Aybolit]

Cigarbutt-

 

Thanks for digging up those additional details, and apologies for my imprecisions.  I agree with you that for these airline loyalty carve-outs to work well requires anchor airlines that are collaborative partners (Avianca, Virgin Australia) that don't turn into predators on their loyalty partners (who provided critical capital and know-how) when a contract end is in sight or for any other opportunistic reason (Air Canada, LATAM).  Aeromexico seems to have at least feinted that they might pursue the latter tactic, but given the remaining length of their contract with PLM (2030) and the joint control and almost equal equity at risk, it is hard to imagine how they could actually pull off such a hard-ball maneuver, or why they would even try given their issues with the 737 MAX grounding and competition from Low Cost Carriers (LCCs) in Mexico, I really don't see them messing with their golden goose (PLM) anytime soon.  And with Aeromexico 49% owned by Delta and Delta increasingly hands on in the management of Aeromexico, and Delta 11% owned by Berkshire Hathaway, I would think Aeromexico is that much less likely to attempt to go gangster on PLM.  But it is Mexico, so we can't completely dismiss the risk. 

 

I did know about the history that Rabe had with LifeMiles, but apparently (based on his resume and from listening to him on Aimia conference calls) he is more of a marketing exec than a financial type, with that critical capital markets expertise provided to LifeMiles by Advent.  I think it's been a lack of financial / capital markets savvy that has prevented the same type of value creation from having occurred with PLM thus far, although Aimia has been paid out more in dividends from PLM than they invested in it, and the business seems to be running well. 

 

So my expectation is that the new board (once it's formed) will provide that missing ingredient, enabling Aimia to maximize of the value of this gem of a business of which they own 49% and jointly control.  And while the new board is still a work in progress and its leaders' ability to steer the ship successfully remains to be seen, I shudder to think what Aimia's stock would be worth right now had these activists not shown up.

 

Pref User-

 

I am confused by your argument that LifeMiles is not a good comp for PLM.  If we accept your premise that "LifeMiles has a world of issues" then wouldn't PLM (presumably lacking those issues) be worth more than LifeMiles, not less, all else being equal?  In any case, LifeMiles' $413M remaining term loan is trading at $97.125 with a 6.75% yield maturing 8/18/22, so while recently off from par it's hardly in distress. I don't think PLM would have trouble raising a $300M 5-year term loan around that rate.  If they haven't renewed/extended the contract beyond 2030 by the time that loan came due in 2025, then refinancing whatever remained at that point would be more difficult, but given that PLM is throwing off about $60M per year in unleveraged FCF right now which is growing, not a whole lot of that loan should be left at that point, so they wouldn't need to refi it, just pay it off over the remaining few years.  Which is why, contrary to your statement that "...a leveraged dividend doesn't make sense to me because it is pulling forward future value..." it really does make perfect sense in such a situation (high FCF conversion, highly recurring, recession-proof, above average growth rate, immense barriers to entry).

 

Also the length of time a sales process takes does not always indicate a lower valuation will be realized, nor does it prove that any and all minority stakes must therefore be reduced in valuation for the supposed liquidity discount.  As you can see in the announcement presentation below, Morgan Stanley was hired initially in 2014 (when exactly it's not stated) which led to Advent paying 10x EBITDA for 30% of LifeMiles (that could have been a year and a half process if it began at the start of 2014).  And Affinity Equity Partners paid 10x EBITDA for 35% of Velocity.  Neither apparently demanded any noticeable liquidity discount.  Affinity got 11x EBITDA for selling that stake, again no liquidity discount.  One might claim the business risk is elevated given Aeromexico's seemingly hostile stance toward PLM recently, if it is indeed more than posturing, but that's a different risk factor and one I think I've adequately addressed as to why war there is actually a low risk outcome.

 

The announcement presentation of the LifeMiles deal with Advent from July 2015 is viewable here: 

 

http://s22.q4cdn.com/896295308/files/doc_downloads/stock_doc/LifeMiles_Deal_Announcement_2015.pdf

 

Again I find it stunning that the Alexander Capital report omitted that Advent-LifeMiles transaction in 2015.  It is remarkable how similar LifeMiles was at that moment in mid-2015 (6.5M members as of 12/31/15 according to Avianca 20-F for 2015) to where PLM is today (9/30/19 at 6.6M members) among other similarities.  That such a savvy private equity firm would pay US$344M for 30% of LifeMiles then (EV $1.15B) must lend some credence to my theory that PLM is worth around $1B now, making Aimia's 49% stake worth US$490M/C$650M.

 

hopefully the new board will be able to work more effectively with Aeromexico to maximize the value of that excellent asset for both parties.

 

[Dr. Aybolit]

correction to my most recent post.  i quoted the LifeMiles term loan at 6.75% yield but I misread that, I think it's actually closer to 8.75%, which is basically 675 basis point above a nearly 200 basis point LIBOR.  i misread the  6.75% spread over libor as the yield.  sorry.

[Cigarbutt]

Even the Gol-Smiles Fidelidade loyalty saga shows that there may be a way to reach some kind of a win-win for PLM.

https://www.reuters.com/article/us-brazil-airlines-gol/brazils-gol-proposes-new-deal-to-buy-smiles-shares-at-25-premium-idUSKBN1YD18R

 

As far as the new activist kids in town, apologies but the following quote comes to mind, since loyalty is the underlying theme:

"One of the common failings among honorable people is a failure to appreciate how thoroughly dishonorable some other people can be, and how dangerous it is to trust them."

Thomas Sowell

 

And will add the following:

"There's talk on the street; it sounds so familiar.

Great expectations, everybody's watching you.

People you meet, they all seem to know you.

Even your old friends treat you like you're something new."

-New kid in town, Eagles

[Dr. Aybolit]

this second attempt by GOL to buy back Smiles doesn't seem much more fair to Smiles shareholders than the first one, but maybe because it's listed in Brazil they can push it through because of the way they structured it?  I don't know how things work down there (I barely know how things work up here) but good luck to Smiles shareholders; Aimia shareholders know your pain and would haven been ecstatic to get for Aeroplan the 5x EBITDA multiple that Smiles is getting.

 

Great quotes re: your skepticism regarding the incoming leadership.  If I shared your concern I might add from my generation, "Meet the new boss, same as the old boss." - Won't Get Fooled Again, The Who

 

But I think here and now with Aimia, the new bosses will likely own nearly 30% of the shares, and the old bosses own almost zero, which means to me that the new bosses are not likely to behave in the same ways as the old bosses did, if, as I think we all believe, incentives matter.

 

of course, some large shareholders over-reach, and some do so egregiously, so how does one know in advance it they're getting a beneficent and competent leader or a greedy tyrant?  Maybe judging character and integrity is more subjective and thus harder than judging the size of the moat or appraising fair value, but then again, maybe not. 

 

in any case i take solace in the knowledge that, based on the terms of the recent settlement, it appears that the settlement was designed so that no one person or group will have actual control of the board, so because of the diversity of interests represented, i think real checks and balances will exist that have not in cases where there was absolute control held by one party (who appointed a hand-picked board of sycophants) and that party overreached. 

 

 

 

 

 

[Cigarbutt]

^In terms of fairness for PLM, it may boil down to not what Aimia deserves but to what they can negotiate. The PLM template looks more and more like the Gol story. I just reviewed Aimia's 2.0 plan disclosed at the end of March of this year and 2 conclusions stand out:

 

1-PLM's then CEO appears on page 24 and the planned collaboration turned into a unidirectional dismissal 6 weeks later.

https://corp.aimia.com/wp-content/uploads/2019/03/Aimia_Q4-2018-Highlights-FINAL.pdf

Watching the evolution of key parameters and using the 'improved' Gol offer (number of members, gross billings, 'adjusted' EBITDA') as a template, I think Aimia should settle for 220-240M USD ASAP because the value (and uncertainty about the value) in the joint venture is likely to go down over time. It's not clear why Aeromexico appears to be so well set in the driver's seat but would assume it has to do with Mr. Duchesne's style as previous Aimia's CEO, who understood a lot about loyalty management but who did not have the same strategic and opportunistic vision as the likes of Mr. Rovinescu, so the initial foundational PLM contracts may have left the 48.9% partner vulnerable in relation with value protection over time. As far as the EBITDA multiple that AC paid for the underlying Aeroplan cashflows (enterprise value point of view), I come to a multiple of +/- 6 since IMO, one has to take into account the redemption liabilities. AC took the short term liabilities without the 'working capital float' and assumed about 2B of longer-term liabilities without any long-term float. The liabilities needed to be deeply discounted (time value of money, going concern replenishment and very high profit margins upon redemption) but not to zero. Apart from paying at the low end of the spectrum, the ingenuity of the transaction was mostly linked to the fact that Mr. Rovinescu was able to force the financial partners to pay (through essentially a perpetual zero interest loan) for a large part of the enterprise value acquired. The Mittleman people seem to think that the PLM's value is much higher than the 220-240M price tag described above and would submit that the unrealistic expectations may be forced to meet reality at some point. But the Mittleman people have been buying shares in the open market in the last few days.

 

2-The game plan for Aimia has radically changed since last March and the outcome is highly dependent on the actions of the significant partner. I like the fact that the legacy loyalty unit will be wound down or sold. I will try to reassess the Mittleman people's long-term track record. The margin of safety continues to go down. I think I understand their style and why their performance has been relatively impacted in the last few years. But it's the future that counts.

[wabuffo]

I will try to reassess the Mittleman people's long-term track record.

 

I've pretty much written off Mittleman.  His recent track record calls into question his investing acumen.  He signed off on Rabe without apparently getting aligned on strategy, etc...  If he has an A-game, he hasn't been bringing it to AIM.TO from what I can see.

 

Frischer is a complete wildcard to me and much more the important X-factor from now on.  Despite his much smaller stake, he will have 3 board seats to Mittleman's 1.  Plus he gets high marks for taking on the AIM.TO Board of Directors and dismantling them (something Mittleman failed to do). 

 

Having said all that, the degrees of freedom for an activist have been sharply reduced over the last year and a half.

 

wabuffo

[Dr. Aybolit]

Cigarbutt - I disagree that the plight of the Smiles shareholders vs. GOL is more likely the path forward for Aimia (PLM) vs. Aeromexico than the Advent (Lifemiles) vs. Avianca template, because unlike the Smiles shareholders who merely provided money when the parent needed it, in the latter two examples, both Advent (Lifemiles) and Aimia (PLM) were fundamental to the success of those businesses, and protected by shareholder agreements that I don't believe the Smiles shareholders have.  For example, the Alexander Capital report glosses over a "put option" in the Shareholders Agreement, but doesn't clarify its terms.  I can't find details on that anywhere on the interweb but I imagine its a benefit for negotiating that Smiles shareholders lack.

 

I also disagree with your assertion that the value will decline in the future so Aimia should seek a sale "ASAP" at a distressed valuation (you posited US$230 mil. at the mid-point (even lower than the US$330 mil. that Alexander Capital claimed) and an EV of US$469 mil., or 5.2x US$90 mil. in EBITDA and 7.8x the US$60 mil. in unlevered FCF), as PLM has grown membership from 2.7 mil. at inception of the JV in late 2010 to 6.6 mil. as of Q3 2019, a 10.4% CAGR, with gross billings, EBITDA, and FCF growing faster.  The projections in the Alexander Capital report show all key metrics more than doubling over the next 10 years, so call it 7.2% growth going forward.  So unless one believes that Aeromexico would actually blow up Club Premier after 2030 rather than pay a fair price, i think time is on Aimia's side.  Also, selling that 49% stake in PLM would almost certainly make Aimia a PFIC, so I don't think they can do it, at all, at least until they have acquired enough in the way of other businesses to avoid that designation which would be toxic to their now largely U.S. investor base.  That's why I think that rather than attempting to sell PLM they should pursue a leveraged recap to payout a large dividend like LifeMiles did, to the great benefit of both Advent and Avianca.

 

in this Aimia presentation from 2012 (see link below) on their success with PLM as of late 2012, both sides highlight how important Aimia was to the growth achieved in the first 2 years of their JV and they publicly claimed that fair value of PLM was US$518 mil. for the EV then, against US$115 mil. in gross billings, and based on 15% discount to that mutually agreed upon valuation Aimia paid US$88 mil. for an additional 20% stake (EV US$440 mil.)  TTM gross billings as of 9/30/19 were US$256 mil., which is 2.2x the US$115 mil. cited in 2012.  At 2.2x the 2012 agreed-upon valuation of US$518 mil. that EV would be US$1.14 bil., with Aimia's 49% stake worth US$558 mil.

 

http://docplayer.net/35123595-Taking-club-premier-how-aimia-helped-aeromexico-optimize-its-loyalty-program.html

 

some quotes from that presentation here below:

 

"Perhaps most importantly to the new company's shareholders, Club Premier has delivered US $115 million in gross billings, with more than 30 percent adjusted EBITDA margin. The joint venture has been so successful that, in October 2012, Aimia and Aeromexico reached an agreement in principle of an additional 20 percent equity participation in PLM by Aimia. PLM s fair value has been established at US $518 million, and Aimia will pay US $88 million, which includes a discount agreed to at the time of Aimia s initial September 2010 investment. The transaction is subject to customary closing conditions, including the execution of definitive agreements and Mexican regulatory approvals, and is expected to close before the end of After closing, the equity participation of Aimia and Grupo Aeromexico in PLM will approximate 49 percent and 51 percent, respectively."

 

"Our partnership with Aimia has been a great success. It is based on trust, collaboration, and mutual respect. Together, we have been able to structure fair agreements, select a top-notch management team, and design a winning business model which delivers great value to Club Premier s members, business partners, and shareholders. In fact, Club Premier's value has just about tripled in just two years. The numbers speak for themselves!" - Ricardo Sánchez Baker, CFO, Grupo Aeromexico

 

The numbers do speak for themselves, Ricardo.  I expect that the new board at Aimia, with an ownership mentality long lacking over there, will be more keen to make sure that someone is listening.

[Cigarbutt]

^You make good points but it takes two to tango. And it's still unclear if there is somebody on Aimia's side who knows how to dance.

 

It appears (this is discovery in the making) that the substance of the PLM contractual agreement between Aeromexico and Aimia favors the former. You refer to the put option provision but that remains to be defined. In essence and even if not explicitly stated in their contract, Aeromexico's side of the bargain in the assorted relationship contains an implicit call option, in the sense that they can opportunistically decide (somehow) to make an offer to complete a buyout when (in the next ten years) they feel this is most appropriate to do so (and noting that their negotiating leverage will tend to increase over time with the looming deadline).

 

Let's say I own a hospital (let's make this a US example since general economic conditions have a significant cyclical effect on healthcare venues' profitability in the US) and we form a joint partnership in an adjacent medical clinic whereby you own 48.9% of the business, you run the clinic operations through a contract running for 10 years but I potentially can use the threat to send patients elsewhere and decide to try to force you out in the next 10 years (whenever I think it is best to do so). I would say that the quality (and value) of the partnership would be highly conditional on the quality of bond underpinning the partnership.

 

In simple terms, my assessment of the quality of the PLM partnership has been going down and it seems that the contractual agreement offers relatively limited protection for that kind of quality.

 

From a 2018 Aeromexico press release:

"Given the long-term intention of Aeromexico to take full control of its loyalty program, Aeromexico does not consider an IPO of PLM as an acceptable option. For this reason it is Aeromexico's view that the best long term solution for all stakeholders is for Aeromexico to acquire the equity stake currently held by Aimia." 

[Dr. Aybolit]

regarding the new board's dancing skills, yes, we don't know how well they will perform, but it is an obvious improvement in odds of success to have a board almost entirely compromised of non-shareholders with an awful track record replaced by a board of major shareholders with a decent long-term track record, and their appointees, however uncertain their capabilities.  so I see the corporate governance aspect as becoming much improved, meaning lower risk, and thus an increase to margin of safety because those who seemed to be pursing a fire sale are leaving and those who clearly believe in much higher values (as their stock holdings and recent purchases and lack of sales into the SIBs confirm) are taking the reins. 

 

regarding your inference that the shareholders agreement of PLM somehow unduly favors Aeromexico over Aimia, given that the document does not appear to be in the public domain, I presume that neither one of us has seen it, so how can such an assessment be made?  The put option that I read about from the Alexander Capital report i think can be reasonably inferred to be, whatever its terms, some advantage over the lack thereof that the Smiles shareholders face vs. GOL.  But I cannot see the basis from which you draw your conclusion that Aeromexico has an advantage over Aimia based on a document that no one (except for insiders) can see.

 

and in contrast to your analogy of a medical clinic handling contract work for a nearby hospital, there is nothing else like Club Premier in Mexico, to my knowledge, and to attempt to undermine it or begin building an alternative before the 2030 contract ends would presumably be a breach of the contract, with major damages owed to PLM, and a potential restraining order impairing the attempted work around.  more importantly, it would likely damage Aeromexico's business, and expose their bank partners to liability as well, all to coerce a proven good partner out of a contract they could otherwise simply buy for a very nice free cash flow yield at a fair valuation?  I can't see how Delta would allow that needless legal risk and customer disruption and cost to rebuild in order to attempt to squeeze out a couple hundred million in undue gains.

 

Aeromexico can posture in press releases, but unless its willing to pay a fair price or risk blowing up the business, i assume that the quality of the partnership is contractually protected until 2030.  if this year was 2027 and Aeromexico had sold all of their PLM stock years earlier, and then said they would seek to replace PLM after 2030, then I might be more concerned, as that would be akin to Aeroplan / Air Canada all over again.  But this is clearly a very different circumstance. 

[Cigarbutt]

The Q3 MIM letter is now circulating.

https://seekingalpha.com/article/4313273-mittleman-brothers-q3-2019-investor-letter

http://www.mittlemanbrothers.com/performance/

 

They report that they feel that they've turned the corner in the last few weeks...

They remain optimistic concerning realizable value at Aimia but this is hard to reconcile with the Alexander valuation report and with the most recent relevant transaction, the Gol-Smiles one.

[wabuffo]

Aimia issued a press release today reminding investors of its upcoming NCIB deadline.  I don't seem to recall a similar reminder earlier this year on the first tender (which was oversubscribed).  How to interpret this reminder...hmmm.

 

wabuffo

[Cigarbutt]

^The reminder is one-sided which would suggest that the lack of interest may be unilateral.

Also, the price action today suggests the common side of the bid may be crowded.

Anyways, this is mostly short term noise and the real fundamental action is set to occur later in 2020.

Will this be another bozo year?

[wabuffo]

Will this be another bozo year?

 

I believe so, yes.  8)

 

wabuffo

 

[wabuffo]

Also, the price action today suggests the common side of the bid may be crowded.

 

It also sounds like the preferred tender at the Company-offered prices is meeting resistance - which subtracts value for the common if it is way under-subscribed.  I thought they had Mamdani on-side...

 

wabuffo

[YVRtrader]

Credit Suisse Securities (Canada) has purchased 6,518,330 shares since the announcement of the SIB and you can be sure they'll tender every share.  They did the same thing for the last SIB, then dumped their remaining shares aggressively.  They won't get a 77% proration this time.

[Cigarbutt]

The oversubscription for both the common and preferred shares has been very high.

Due to the issuer bid with the valuation exercise, I wonder if insiders have not set themselves in a tight spot if Aeromexico submits a bid for the entire enterprise. The new team would try to negotiate and they do hold a relatively significant stake but the infatuation for the common buyback is hard to reconcile with the valuation that MIM reported at the end of Q3 for AIM.

 

Some numbers:

Total shareholders' equity (-53.2M reported for PLM) is expected to be about 519-125=394M at the end of Q4 2019. Apart from the recurrent stuff, I assume some positive contribution from the last Cardlytics sale during Q4 to balance the residual negative legacy costs.

 

Given that the retail crowd and the majority owner of preferreds are yelling "we're for sale", here are some possibilities and the resulting price tag for the PLM entity form Aeromexico's point of view.

 

Offer:    commons: 4.25    preferreds: redo of last bid                price tag for PLM: 175M (CDN)

Offer:    commons: 4.50    preferreds: redo of last bid                price tag for PLM: 200M

Offer:    commons: 4.50    preferreds: half-way back to par        price tag for PLM: 231M

Offer:    commons: 5.00    preferreds at par                              price tag for PLM: 311M

 

I think the new Aimia has set itself up to be an easy target and that may not be the worst case scenario.

The following is sentiment-based, but, if post-buyback AIM's buyback history is any guide, common shares are likely to trade down in the next few weeks.

Happy new year.

 

 

[wabuffo]

I think the new Aimia has set itself up to be an easy target and that may not be the worst case scenario.

 

CB - I think you make an astute observation.  Aeromexico's senior mgmt must be watching this and realizing that they could make a bid for AIMIA's common shares at a price not too far from their $180m USD rejected offer for the 49% stake (when you adjust for AIMIA's bag of cash/bonds plus tag-end assets).  They see that at $4.25 they would get a stampede to sell and get control of PLM (albeit through a cumbersome structure) and even strand the preferreds.  I haven't done the math - but I'm sure someone at Aeromexico is doing it.

 

I fully expect an offer is coming in 2020 and I don't think it will be anywhere near where Mittleman wants it to be.

 

wabuffo

 

 

[Pref User]

Dr. Aybolit, after reading your post on December 14 I now get why you want the dividend recap and it makes a lot of sense. The PFIC rules will really tighten or force Mittleman's hand, especially since they won't have control of the board so they can't just make an acquisition without permission. So does that leave us with three possible outcomes? First, Aimia makes an acquisition which then allows Aimia to sell PLM. Second, Aeromexico acquires Aimia for its PLM ownership. Third, nothing happens and the value continues to dwindle away.

 

As for the acquisition of Aimia by Aeromexico to get PLM, does anyone know the voting rules for Aimia on transactions? Is it supermajority or is it 50%+1? Cause if it's supermajority Mittleman is back in control as they only need to get another 4% of votes to block anything, or just get the Fisher group on their side. If that is the case we are now all slaves to a new owner who we thought had the same incentives as us but apparently not. 

[Cigarbutt]

There are various scenarios but the path leading to AeroMexico buying Aimia could be defined quite rapidly. The following is an opinion and legal technicalities (form or arrangement etc) may have an impact but my understanding is that 66 2⁄3% of votes are required for further steps leading to regulatory and, ultimately, legal approval. If this happens, this may be straightforward or complicated, may happen in one or more steps, may alternate between friendly and hostile, may involve parallel dealings between the common and preferred side. The key player is MIM and they have decisive weight but they are in a relatively weak position for many reasons, including the fact that their main holdings (eg REV and AMC) have done poorly (in terms of market quotation and on a relative basis) in Q4.

 

If interested, it may be relevant to compare to a relatively relevant comparable when Lowe's acquired RONA in 2016.

Timeline

-2/2/16    acquisition agreement announced, offer CS 24$  PS 20$ + accrued interest (par 25)

-31/3/16  CS vote 99.9% yes    PS vote 74.8% no

-agreement 'amended'

-20/5/16    transaction closed, acquisition completed (control)

-decision to keep preferred shares, as stranded, reporting requirements adjusted to new status

-various options considered and main holder of preferred shares 'consulted'

-fall 2016  new offer to buy preferreds because of (presumably) relatively high and tax-inefficient financing costs, listing costs and reporting costs, at 24$ (clean price)

-15/11/16  PS vote 95.2% yes

-done deal

The end

 

The above (IMHO) helps to gauge the odds and I made my mind for the 'value' that should be offered to CS and PS. I also just sent a detailed letter to relevant boards on the acquirer's side to help balance the 'fairness opinions' that may be asked along the way and to support what I perceive to be weak actors on the acquiree's side.

[Homestead31]

Cigarbutt- thanks for all your work on this.  i'm not sure i am understanding you though...  are you saying that the PFD shares would get a vote if Aeromexico were to bid for Aimia?  i don't think that is the case?

 

and do you have a position here?  based on your comments it doesn't sound like you would be long... but it also sounds like you sent a letter to the board of Aeromexico and PLM telling them they should try to buy out Aimia?  and if you did do that, it seems odd that you would do that when it seems like Dr Aboylit's ideas about value would have so much more upside?

 

and also, if aeromexico were to try to buy Aimia, how would they pay for it?

 

thanks

[Cigarbutt]

^I'm long both the preferred and common shares with a similar 'expected' outcome, with the upside and downside magnified for the common exposure and i don't intend to hold for the long term.

If Aeromexico goes for it, I assume that they could obtain financing (plain vanilla debt or through credit card issuers cash 'infusions") given the profile of recent similar transactions. It seems to me that lenders would be more flexible (rate, terms etc) in the case of a parent debt-funded acquisition versus a sub debt-funded dividend (especially given the EBITDA multiple range that would be applied for the acquisition). I would be surprised if Aeromexico goes along with a dividend recap scenario (unless somehow forced to) as it would entrench Aimia's PLM ownership more. I think they want to get rid of them at the lowest possible price.

AFAIK, there is no change of control provision in the preferred share 'indentures', so a vote for control is not necessary. However, i come to the conclusion that, on a weighted basis, the disadvantages of keeping stranded preferreds are more important than the advantages, especially if a formal take-over is contemplated.

But I think it would help if our local dreaming-to-be-investment-banker would write to respective Boards to get discussions going. :)

I also hope that Aimia is proactive and trying to get offers for their legacy loyalty business.

 

 

[Homestead31]

so it sounds like you are willing to sacrifice potential upside in the common in order to protect your investment in the pfds?  because why else would you write to encourage aeromexico to try buy out all of Aimia, and thus "steal" PLM for a low price, rather than root for Dr. Abolyit's plan, which would have much more upside for the common, but probably no impact on the pfds?

 

That isn't a criticism by the way - that is just level setting.

 

moving past that, i think you are right to think that Aeromexico wouldn't want to go along with a dividend recap unless they were forced to, but it seems like we are pretty close to that point, no?  i mean, T12M Aeromexico had $7M in EBIT and $96M in gross interest payments...  that isn't a recipe for success, and a cash infusion in the form of leveraging PLM and then dividending cash to the parent would of course help solve that problem.

 

As for financing a potential acquisition, i don't think they'd want to / be able to take more debt at the parent level as they are already pretty stretched.  the cash infusion from CC partners seems to be an option, but there also seems to be a chicken and egg problem there which i would think makes trying to go after Aimia rather than just PLM more difficult.  In other words, in order to bid for all of Aimia, PLM will need "funding secured" in order to deal with what would likely be a contentious battle...  but i don't think the CCs would be willing to give them that money unless the outcome was predetermined.  that of course leaves equity which could come in the form an equity raise (presumably 50% backstopped by Delta), but that would likely come at a significant discount, or in the form of using equity as currency, which seems unlikely to be supported by Delta since it would dilute their position.

 

i still think Delta makes sense as a buyer of Aimia's PLM stake rather than Aeromexico.  Simply stated, airline loyalty businesses are much better businesses than the business of actually flying planes.  Mexican stock ownership rules mean that Delta can't own more than 50% of Aeromexico unless they bid for the whole thing (or get an exception granted), and it seems unlikely that AMLO would want the country's flagship airline to be owned by a US company, but as PLM is not public there is nothing i am aware of (i am definitely not an expert here though) that would complicate the idea of Delta bidding Aimia for PLM and thus bringing their economic ownership of PLM to 75%.  Given the control they have at the aeromexico level, it is difficult to see aeromexico doing anything to sabotage Delta if they were to do this. 

 

 

[Cigarbutt]

^Simply stated, this is not to obtain a good deal for one side at the expense of the other, it's simply (my perspective) to assess the best risk-reward outcome from a total enterprise value point of view. So, it's a matter of assessing scenarios from a likelihood or possibility point of view. I'm all for it but I don't think a dividend recap is in the cards. I could be convinced to hold this for the long run but that would involve building enough confidence in MIM and acolytes and showing how a delay in monetization of PLM could make sense. The valuation parameters for PLM will lie between Velocity (more on that below) and GOL-Smiles (more towards the latter IMO) and will tend to gravitate towards a Multiplus-like multiple or worse over time.

 

In terms of Aeromexico (directly or indirectly) buying PLM or Aimia and the financing required, take a look at the link below (the whole document is interesting but especially pdf pages 65-67 and 83).

https://www.morgans.com.au/morgans-assets/PDFs/Virgin%20Australia%20Notes%20-%20Prospectus.pdf

Quite frankly, if MIM et al can negotiate a PLM deal valued at 16.1x segment EBITDA (or a 14.0x, "post cost synergies"), I would be ready to pay these guys a 2-week all-included Caribbean vacation but, with reasonable reserves, I would submit that they apply value precepts that could work under selective circumstances but don't seem to have what it takes to capture the PLM value during this transition and that's why (I'm not sure this makes a difference) I send materials to different parties in order to build some kind of defence (floor in value) as Aimia is IMO relatively vulnerable at this point (buyback with an implied low 'Alexander report' PLM value lower than what MIM accounts for, fund redemption pressures to come etc) but pushback would be welcome here if I'm wrong. Leverage (as far as I can tell, need to dissect fleet financing from 'financial' debt) at Aeromexico is comparable to Virgin Australia (before debt incurred from the Velocity stake buyback) and that did not stop the Velocity buyback. Note that the 700M raised (of the 750M total) has an 8% interest rate to it meaning that the 35% stake has a "pro-forma" interest stripe to it of 56M compared to a segment 3-yr avg EBITDA of 46.3 and a segment 3-yr free cash flow of 42.2, implying that the value from the transaction will not come from interim cashflows but from the terminal value with a starting point at 16.1x EBITDA. Again, if they pull a Velocity buyback trick, I will amend and accept that they are great but I don't think this is a reasonable scenario. So, given the related access to debt for Virgin Australia and the incredible thirst for yield (the Velocity-related debt issue was increased due to significant demand), I don't think access to debt for Aeromexico would be a problem, especially given the absence of debt at PLM and the more reasonable acquisition parameters and related faster payback period. BTW and FWIW, I wake up sometimes and hope that we don't live in a financial Alice-in-Wonderland world but it seems that we do, still. Somebody else seems to think that we live in interesting times:

https://www.livewiremarkets.com/wires/virgin-australia-s-very-junky-debt-raising

 

And add to that today's announcement that Aeromexico has settled a hanging cloud:

https://business.financialpost.com/pmn/business-pmn/aeromexico-reaches-compensation-deal-with-boeing-over-max-crisis

 

[Dr. Aybolit]

Just got back from a nice little vacation in Mexico with my grand children in tow; sadly we did not fly Aeromexico.

 

the talk on this board seems to continue to center around a sale of PLM or Aimia, neither of which seem to be the most likely outcome here given the size of the two largest shareholders' ownership stakes (combined likely close to the 33.3% needed to block any takeover) and their seeming intent to make Aimia into an investment vehicle, and avoid PFIC designation.

 

but that doesn't mean the stock doesn't satisfy both the longer term ambitions of those largest shareholders, and the shorter term time horizon of the more vocal message board posters.

 

i think Aimia here at C$3.53 is an awesome risk/reward ratio, with the Advent-Lifemiles-Avianca model being the most likely path forward.  i reiterate (from my dec. 14th post here):

 

"PLM has grown membership from 2.7 mil. at inception of the JV in late 2010 to 6.6 mil. as of Q3 2019, a 10.4% CAGR, with gross billings, EBITDA, and FCF growing faster.  The projections in the Alexander Capital report show all key metrics more than doubling over the next 10 years, so call it 7.2% growth going forward.  So unless one believes that Aeromexico would actually blow up Club Premier after 2030 rather than pay a fair price, i think time is on Aimia's side.  Also, selling that 49% stake in PLM would almost certainly make Aimia a PFIC, so I don't think they can do it, at all, at least until they have acquired enough in the way of other businesses to avoid that designation which would be toxic to their now largely U.S. investor base.  That's why I think that rather than attempting to sell PLM they should pursue a leveraged recap to payout a large dividend like LifeMiles did, to the great benefit of both Advent and Avianca."

 

Aeromexico acknowledged being a little low on cash on their last quarterly conference call, in response to an analyst question, and that they were considering ways to raise capital to cure that.  I would think that leveraging the loyalty program would be the easiest and highest ROIC way of doing so.

 

Lastly, I am flummoxed by the skepticism about the activists here, and their supposedly misaligned incentives or ineptitude.  Did they not save us, all Aimia stakeholders, from the most odiously disinterested group of non-owner sycophants ever, and at huge cost and risk to themselves?  Would you prefer the old regime remain in place?  I could care less if they get "control" or not, but I am very happy to have major shareholders at the helm who seem reasonably adept with a decent long term record, even if they are not the second coming of Buffett, or the third coming if Prem Watsa was the second. 

 

But I wonder what skepticism Prem Watsa might have encountered at age 35 when he took control (control! oh no!) of Markel Insurance in 1985 (while he was still running his 1 year old money management firm, Hamblin Watsa) and turned it into Fairfax.  Isn't Aimia a far better risk/reward today than Markel/Fairfax was then?  Markel had blown out their combined ratio (143% in 1984, 127% in 1985) and was losing money and needed a capital infusion from Prem's group to survive.  Their book value per share had fallen from $11.29 in 1983 to $3.65 in 1984 to $2.25 in 1985.  It was a real turnaround situation, whereas even if you assume zero value for the rest of Aimia's businesses, PLM is recession-proof and doing US$90 mil. in EBITDA and converting US$60 mil. into FCF and growing double-digits alongside the flagship air carrier of Mexico.  I'm not saying Aimia will become another Fairfax, but just compare and contrast the starting points of those situations at those moments of change. It should not require an investing genius to at least see this through to a 100% gain from here, and in very short order i would think.

 

or maybe i just had one too many Margaritas down there...  but I do feel unusually optimistic about this one.

 

-Dr. Aybolit