AIM.TO - Aimia

[Homestead31]

WB and CB - just curious how you were valuing the loyalty assets (ILS etc) prior to the news today?

[wabuffo]

WB and CB - just curious how you were valuing the loyalty assets (ILS etc) prior to the news today?

 

They were a zero - and that was me being charitable.  The reality was that I didn't have them valued but just assumed continued cash operating losses. 

 

wabuffo

 

[Homestead31]

ok, and now they are worth 49% of an entity that just got a $525M valuation.  If that is not a rabbit out of a hat, i don't know what is, yet you are unhappy?

 

you have done some great work on this thread, but you are destroying your credibility by complaining about this.

 

Fine - $525 is just a mark, maybe its a garbage mark... but the founders putting in $10M at the valuation should count for something, and the fact that independent investors valued it at $400M in October before the combination counts for a whole lot in my mind.

 

Very strange to see you or anyone unhappy with this.

[wabuffo]

Fine - $525 is just a mark, maybe its a garbage mark

 

We'll see if the mark means anything. 

 

The big news today though was the impairment of PLM.  That torpedoes the investment case here, IMO, given the continued presence of the preferreds.

 

After this restructuring, they will have a $15m annual cash burn (if I take them at their word for their go-forward operating expenses) and little to no cash coming in.  Perhaps Mittleman hits some investment homeruns, perhaps he doesn't. 

 

Turnarounds seldom turn. 

 

wabuffo

[Dr. Aybolit]

I'm impressed.  I had ILS/ISS/LS whatever it's called now at $0.  So even if it's just worth C$100M now, that's a found dollar of value I hadn't been counting before.  And it looks like this Kognitiv thing is legit, with decent funding at pretty high valuations previously.  the founder also founded Descartes (DSG CN) which did well.

 

Also I don't think PLM is impaired just because it will have a bad year.  In 2003 Air Canada had a tentative deal to sell 30% of Aeroplan to Onex (Gerry Schwartz) in a desperate attempt to stave off bankruptcy.  but bankruptcy came before the deal could close.  but the valuation was north of 8x EBITDA.  so that was in distress.  was Aeroplan impaired in 2003 because of SARS and its parent airline in bankruptcy?  didn't seem so when they brought it public two years later at 15x EBITDA. 

 

anyway, i listened to the webcast of the annual meeting, reviewed the presentations, and i am more confident, not less, in my estimate of NAV being north of C$8.00 now.

 

i know that's a bit above the $0 ascribed to it by the more conservative members here, but i am happy to play the optimist on this one, as i really think this is something special taking shape.

 

- Dr. Aybolit

[wabuffo]

i know that's a bit above the $0 ascribed to it by the more conservative members here

 

Didn't say AIM is a zero. 

 

wabuffo

[SnarkyPuppy]

https://finance.yahoo.com/news/aeromexico-expands-relationship-aimia-203500804.html

[Homestead31]

looking forward to see what sort of mental gymnastics wb and cb will do to say that this is anything other than a great development.

[wabuffo]

looking forward to see what sort of mental gymnastics wb and cb will do to say that this is anything other than a great development.

 

Its definitely good news --- if, Aeromexico survives this crisis.

 

We'll have to see the specific terms of the deal when they come out. If Aeromexico doesn't survive, what is the value of PLM as an unsecured creditor to Aeromexico?  I hope the loan carries a double-digit interest rate.

 

wabuffo

[Cigarbutt]

Here goes :) :

The announcement is positive as Aimia has been able to obtain concessions (later) in exchange for a 100M loan now.

Did you see the last Aeromexico operational statistics?

They now announce a 10M dividend from PLM for Q2 after having just reported that distributions would be materially impacted for 2020.

Is this value creative or just inter-temporal financial engineering?

 

i hope Mr. Market gets a high from this and maybe the Q1 report will bring more action but here's some mental gymnastics: Aeromexico gets a bird in the hand now in exchange for many birds in the future but, effectively, Aimia is providing DIP financing with discretionary minority interest coupons and collateral mainly based on PLM equity warrants far into the future.

 

Last accounting gymnastics-type of observation:

Announcement from Aimia's point of view: Aimia Expands Relationship with Aeromexico

Announcement from Aeromexico's point of view: Aeromexico Expands Relationship with Aimia

It's a relatively poor analogy but this reminds me of derivative transactions where both the party and the counterparty report a profit from the transaction at the onset. The analogy is poor because this could be a win-win but unlike the derivative accounting nonsense, this could be a lose-lose also.

[bizaro86]

The main consideration going to Aimia is the 20 year extension. That gives them significant leverage in a sale (which is probably why the option was negotiated).

[samwise]

Cash now for promises later. Reminds me of Aeroplan helping out Air Canada back in the day.

 

How good are the promises? Unsecured creditor with an agreement which can be rejected in bankruptcy ? Or DIP who will survive anything as long as planes still fly?

 

On AIM itself.. now we have a SOTP with external marks, but I doubt the market closes the valuation gap by itself.  The principals probably want to invest the cash. Hopefully there will be ample opportunities.

[Pref User]

Not shitting on this deal, but is anybody else confused by it? All I am saying is I thought Aeromexico controlled the board, and clearly has voting control. Could they have not done the debtor in process financing and the advanced purchase of points without giving Aimia the deal? Or am I missing something and Aimia put more cash into PLM?

[wabuffo]

Not shitting on this deal, but is anybody else confused by it? All I am saying is I thought Aeromexico controlled the board, and clearly has voting control. Could they have not done the debtor in process financing and the advanced purchase of points without giving Aimia the deal? Or am I missing something and Aimia put more cash into PLM?

 

I would think their agreement would've prohibited that kind of raiding of cash from PLM.  I hope we get to see the actual legal agreement T&C's. 

 

The real question is - would you lend $100m unsecured to any air carrier these days whose April passenger traffic stats are down over 90% and whose senior bonds are trading in the 30s?  And what kind of protections and upside would you extract?

 

It seems to me what AIM got for this risk profile is kind of weak sauce in terms of upside.  But WDIK.

 

wabuffo

 

The investment in Clear Media Limited was acquired through a series of common share purchases totalling 58.8 million common shares, which included 19.6 million common shares previously held by clients of Mittleman Investment Management

 

Hmmmm....

 

EDIT: - based on the CC, PLM's loan is secured by Aeromexico's equity in PLM.  So we'll have to see what % of PLM equity $100m represents.

 

Nice day for the AIM longs.

 

[wabuffo]

Ok - I listened to the AIM CC to see if we got more details on the Aeromexico PLM deal.  I tried to quickly transcribe it, but may have missed or gotten some of the details wrong.

 

Aeromexico/PLM deal details:

- PLM has $170M USD in cash on balance sheet with no debt before the advance and loan to Aeromexico.  Its redemption liability is $230M USD.

- Advance and loan secured by Aeromexico’s 51.1% equity stake in PLM.

- New shareholder agreement grants Aeromexico a 7-year option to purchase Aimia’s 48.9% equity interest in PLM at a price of net adjusted EBITDA multiple of 7.5x, with a minimum floor of $400M USD.  (thus option expires in 2027 (?) even though new agreement goes to 2050).

- PLM advances $50M USD to AeroMex in the form of an intercompany loan with an interest rate of 6% and another $50M in the form of PLM pre-purchasing $50M USD of award tickets on Aeromexico flights.  The $50M pre-purchase gets funded to PLM operations through normal gross billings/redemption activity (ie, higher future PLM operating profit due to pre-funding of direct costs of redemptions of Aeromexico flights by PLM members).  Half of the $50M USD loan requires Aeromexico to pay it back, the other half gets “paid back” in the event of a leverage recap of PLM (ie, netted against PLM’s share of the dividend).

- Aimia mgmt. expects PLM to be negatively impacted by the virus, resulting in materially lower gross billings, adjusted EBITDA and cash flow for the remainder of 2020.  Consequently, Aimia mgmt. now expects no distributions from PLM operations in the second half of this year.

- Aimia mgmt. thinks that based on normalized PLM EBITDA resuming to normal levels, they could do a PLM recapitalization transaction in the 3-4X range which would provide $200M-$300M USD to PLM. PLM then would dividend that out to Aeromexico and AIM.  So AIM would get a bit less than half of that amount.  But recap would be dependent on Aeromexico recovery.

 

I dunno:

- A severely distressed borrower (Aeromexico) borrows $100m and the terms you give them are: 

- Borrow $100m unsecured (yeah sure its secured by Aeromexico's equity in PLM, but this quickly gets circular if Aeromexico goes titsup, since the $100M USD is gone and the PLM equity is impaired. ie, AIM owns a slightly greater percentage of PLM that, in turn, is worth far significantly less).

- Promise to pay back $25m in cash (due ?, not disclosed on CC)

- Promise to pay back $50m back in Aeromexico seats (which cost Aeromexico $10-$15M in marginal cost?) over the next 2-3 years (whem/if Aeromexico recovers and passenger traffic resumes fully?).

- Promise to pay back $25m by foregoing equivalent dividend distribution from PLM when/if PLM recapitalization happens (again predicated on Aeromexico recovery).

 

In return, AIMIA gets:

- a 20-year extension on current partnership agreement with Aeromexico (to 2050)

- a seven-year valuation put option (7.5x adj. EBITDA or $400m USD whichever is higher til 2027).  No disclosure on what happens after 2027 to the valuation put option.

 

What does PLM get? (during the a period when PLM's EBITDA and cash flows will be squeezed and it will no longer be able to make distributions to its equity owners):

- Its $170M USD cash pile gets reduced to $60M USD (vs $230M USD redemption liability) due to $110M in loan to Aeromexico and $10M distribution in Q2.

 

I dunno - raiding PLM's piggy bank right now to get extra risk exposure to a distressed airline seems insanely risky just to get a headline valuation that will expire in 2027 unless the airline making the offer expires first.  I would've stood pat and waited and kept my half of the cash in a bankruptcy-remote PLM.

 

wabuffo

 

 

[samwise]

Never a dull moment with this one :).

 

So whats the plan with Clear Media?

MIM has bought a blocking 10% stake in what he probably considered a cheap take-under. No reaction in the price.. Do the arbs think this still goes through? Or will MIM try to get a stake in the private vehicle buying Clear media?

 

MIM's writeup on Clear Media: https://valueinvestorsclub.com/idea/Clear_Media_Ltd./5685044499

 

Hong kong takeover code: https://www.sfc.hk/web/EN/assets/components/codes/files-current/web/codes/the-codes-on-takeovers-and-mergers-and-share-buy-backs/the-codes-on-takeovers-and-mergers-and-share-buy-backs.pdf

 

See 2.10 (b) for the 10% votes needed, I assume that applies to tenders too, but I haven't read the tender document.

[Sunrider]

Never a dull moment with this one :).

 

So whats the plan with Clear Media?

MIM has bought a blocking 10% stake in what he probably considered a cheap take-under. No reaction in the price.. Do the arbs think this still goes through? Or will MIM try to get a stake in the private vehicle buying Clear media?

 

MIM's writeup on Clear Media: https://valueinvestorsclub.com/idea/Clear_Media_Ltd./5685044499

 

Hong kong takeover code: https://www.sfc.hk/web/EN/assets/components/codes/files-current/web/codes/the-codes-on-takeovers-and-mergers-and-share-buy-backs/the-codes-on-takeovers-and-mergers-and-share-buy-backs.pdf

 

See 2.10 (b) for the 10% votes needed, I assume that applies to tenders too, but I haven't read the tender document.

 

Judging by the Aimia release I think they intend to not tender and hold their shares ....?

[samwise]

^^

Yes which is why the position size being above 10% is important. It seems that 10% is the minimum size needed to block the takeover, based on the HK link I pasted above.

 

But does MIM want to just block the takeover, or do they want to be investors when the company goes private. Possible for AIM, but not easy (or in mandate ?) for MIM itself. Or just block to get a higher price, or greenmail, if that is possible in HK. Thats possibly the quickest win for AIM from my perspective (as we just get a quick return on cash). Lets see how the arb spread reacts tomorrow.

 

BTW, they could do the same with Revlon (block Perelman by buying 10%), but might be hard to accumulate 10% there.

 

Edit: they confirmed all this in the call today. 10% helps block crackdown, they want to keep owning the private company. MIM couldn't hold the private company so selling to AIM and holding AIM lets them participate. AIM can utilize capital losses to shield taxes.

[wabuffo]

BTW, they could do the same with Revlon (block Perelman by buying 10%), but might be hard to accumulate 10% there.

 

Remember when people feared that Mittleman would turn AIM into his personal investment vehicle?  ???

 

wabuffo

[samwise]

Yes its his vehicle now in practice.

 

But legally the owners are his investors in MIM.

 

The only AIM shares he has should be the ones he and his brother got for selling MIM to AIM.

 

So if he loses his investors, he can't control AIM.

[wabuffo]

Not what I meant.  If he hadn't wrested control of AIM, he would've been squeezed out of his Clear One position by the tender and been forced to tender shares. 

 

wabuffo

[samwise]

oh yes. Agreed.

He is lucky with timing too. I think the tender ends within a week.

[Homestead31]

I dunno:

- A severely distressed borrower (Aeromexico) borrows $100m and the terms you give them are: 

- Borrow $100m unsecured (yeah sure its secured by Aeromexico's equity in PLM, but this quickly gets circular if Aeromexico goes titsup, since the $100M USD is gone and the PLM equity is impaired. ie, AIM owns a slightly greater percentage of PLM that, in turn, is worth far significantly less).

 

wabuffo

 

why would this get "circular"?

 

plenty of businesses continue to operate during bankruptcy... so even if aeromexico went bankrupt, it is entirely possible - if not even likely since they are mexico's flag carrier - that they would continue to operate, which means PLM would continue to operate without impairment.  Conceivably $50M of the loan to Aeromexico would be in a precarious position, but it is not clear to me that the 50M of reward seats would be affected.  Do you have anything to point to that suggests it would be affected?

 

and you neglected to cite the commentary around lifemiles and avianca in your recap of the call.  do you have any thoughts there?  because it seems like despite Avianca's bankruptcy, lifemiles is continuing to operate without impairment.  is there a reason to believe that PLM would be impaired by an aeromexico bankruptcy that does not apply to Avianca?

 

[Homestead31]

worth reading for those concerned about bankruptcy at Aeromexico:  https://www.forbes.com/sites/advisor/2020/05/15/what-happens-to-your-miles-when-an-airline-declares-bankruptcy/#529b1dce2a16

 

TLDR: nothing is ever certain, but seems very likely that PLM and thus Aimia would be just fine if Aeromexico declared BK... in fact, one could even argue that on a longer timeline Aimia would come out ahead because if Aeromexico goes BK, Aimia will wind up owning a bigger piece of PLM due to the secured loan.  That doesn't mean that the stock wouldn't get hit in the near term - surely it would - but long term holders would likely come out ahead

[wabuffo]

Homestead31 - you make good points, and I don't necessarily disagree with you about normal airline bankruptcies and the bankruptcy-remoteness, legally, of the loyalty programs when they are separate legal entities...

 

But:

 

1) Normal bankruptcies of airlines are individual reorganizations when the aviation industry is operating with normal or near-normal demand levels.  So yes, operationally, nothing changes while the creditors work out a restructuring with the other creditors and unions.  But I think you would agree that every airline in the world is essentially insolvent - AND MOST IMPORTANTLY - demand is down 90%.  No one will even provide DIP financing.  And what will consumers and governments demand from airlines before they are allowed normal flights in terms of plane capacity restrictions (middle seats empty, etc)?  When will international travel/border restrictions be removed for non-essential flight operations? 

 

AIMIA (via PLM) is lending into that environment.  Why aren't PLM's credit card partners also pre-buying seat redemptions on Aeromexico flights?  I haven't seen any concurrent announcements from Banco Santander, have you?  Some might argue PLM is even more important to banks and their front-of-wallet loyalty credit cards than it is to Aimia.

 

2) I looked at your example of Avianca and its LifeMiles loyalty subsidiary.  It looks like it has a $400m USD loan o/s that has fallen from 100-cents on the dollar to 80-cents as of today.  But I think we have to equalize the capital structures if we want to make comparisons to PLM.  I'm just going to make up some numbers here because LifeMiles equity is privately-held (SWAG's really)

LifeMiles:

Debt---------------------$400M x .80 = $320

Redemption Liability----$150M x .65 = $100

Equity -------------------$200M x .25 = $ 50

TOTAL CAPITAL ------$750M        =$470  (62.5%)

PLM:

Redemption Liability----$230M x .80 = $184

Equity--------------------$700M x  ?? = $???

TOTAL CAPITAL ------$930M x .625=$580

 

So backsolving $580M-$184M= $396M for the equity.    So at $400M valuation - that's a pretty big impairment from the current $700M valuation (using the 7.5x adj EBITDA metric and 2019 PLM adj. EBITDA).  I would argue its even worse, because PLM's cash position is low because of the $110M USD cash outflows in this deal.

 

Look - I'm not saying that AIM made a bad deal with AeroMexico but I don't love it.  I think they could've waited since they have a contract til 2030 and maybe gotten an even better deal as AeroMexico's desperation grows.  What I do see is that they have increased the risk profile tremendously if Aeromexico defaults and/or liquidates. But I sense this new management team was desperate to get press releases out quickly because their investors are fleeing from them. 

 

Aeromexico continuing to operate mean little when it means continuing to operate at 10-40% of normal passenger volumes.  Will the government of Mexico rescue it?  I don't know - but they could do a GM and liquidate it into an new GM/old GM structure and stiff creditors while taking all the good assets (like their 51.1% ownership of PLM) into a new structure.  Lord knows, there's lots of planes and pilots available on the market.

 

Full disclosure - I still own some of this stock.  But I'm not excited about it.

 

wabuffo