AIM.TO - Aimia

[samwise]

Anyone worried about cash flow here?

 

20 people at headquarters cost 15 million. Lucrative jobs!

 

Owns a few private holdings, no cash dividends from them likely, maybe some on the kognitive prefs.

 

190 million cash to use the tax loses. If they buy something at 10% FCF, that barely covers headquarters costs, and doesn’t cover preferred dividends. So they will need to buy with lots of leverage, or at a 20% FCF yield to be cash flow break even.

 

NAV rich, cash poor.

 

I just hope they don’t start charging 2 and 20 for their investment skills like Falcone at HCHC. That hasn’t gone so well.

 

Edit: they are losing investors. Recent update in SEDAR:

AIM stock controlled went from 25.4% to 20.8% due to “termination of discretionary investment authority “

 

[kab60]

Yep, those HQ quarter costs seems crazy. If they can't bring those down I'd capitalize it at a very high multiple. Maybe like 16-20x like PE management fees. Hc2 is a good analogy. Decent dealmaking, absolutely killed by HQ costs and interest.

[Dr. Aybolit]

So I'm disappointed by the 7.5x EBITDA multiple for PLM (I remain convinced 10x is minimum fair value), albeit somewhat assuaged by the US$400M (C$560M) minimum, which is much higher than the sell-side or bears here have estimated, and nearly C$6.00 per Aimia share. I hope we can take $0 off the discussion table now.

 

Wabuffo you mistakenly consider points liability in enterprise value, as I've pointed out before, that is never done (except for Alexander Capital report, questionable not only for that novel treatment of the points liability but also for excluding LifeMiles from the comps, beyond bizarre) in this industry or in consideration of loyalty values in airline M&A more broadly, it is simply a negative working capital benefit that is intrinsic to the nature of the business as long as it remains a going concern.

 

and the comments about the company being "cash poor" are perplexing in light of the significant cash balance and no debt.  and as for cash flow, PLM continues to pay cash dividends, albeit at a vastly lower rate this year, but will likely resume once business returns to normal.  And from the conf call it sounds like they are in fact considering a leveraged recap of PLM at some point, which would mean more cash coming to Aimia (as soon as debt market allows).

 

I reiterate a point I made in a previous post that Aeroplan sailed through the bankruptcy of Air Canada in 2003 with a very brief (one or two quarters) of impact, before resuming its path of steady FCF generation (on an annual basis) and growth.

 

from my April 3rd post here:  " Anyway I see the recent news as progress.  Aeromexico should be much more pliant now that they truly need cash.  And PLM should be highly resilient, as Aeroplan was, even in 2003 after 9/11 and SARS when Air Canada went bankrupt, Aeroplan continued growing membership and generating cash, see page 19:  https://corp.aimia.com/wp-content/uploads/2017/11/Investor-Presentation-March-2009.pdf  "

 

lastly, I think the HQ costs are very reasonable now, as I can't think of a public company, here or in Canada, that could operate with much less.  and remember C$15M = US$11M.  and given where those costs where, my god people, you are complaining now? 

 

and I love the Clear Media buy, that is the kind of thing I was hoping to see, and to see it happening is very encouraging. 

 

more and more this smells like Leucadia circa 1980, or Fairfax 1985.  cut costs, invest in cheap FCF-generating things, frugal, opportunistic, contrarian, value-oriented owner-operators involved, major skin in the game.  cash rich into a major mark-down in valuations on offer.  obviously anything can be screwed up, but what a perfect set-up.

 

-Dr. Aybolit

 

 

[samwise]

Dr. Do you have an estimate of what FCF Aimia can generate after the cash is deployed?

 

Yes a lot of good things can happen in some good scenarios, including the recap of PLM.

 

I own some of this. But the HQ expenses seem excessive to me. RBCN (cash shell currently), spends 2.5 million annually, SPRT spends 7.6 million on G&A. What is AIM spending 15 million on when it has no operations now?

 

Now I am going to have a drink and hope for good outcomes only.

[Dr. Aybolit]

holdco cash burn probably turns positive in 2021 if remaining cash deployed with reasonable FCF and dividend payout.

 

PLM dividend paid to Aimia in Q1 was C$9.5M, plus C$7M expected in Q2, and none in second half, so this year is a below average C$16.5M in dividends received.  I think 2021 returns to normal, implying a C$25M dividend from PLM, minus C$13M in pref. divs., minus C$5M in tax on pref. divs. = C$7M minus C$15M in holdco costs = -C$8M in cash burn which is 4.2% of the C$190M in cash remaining.  So they'd have to clear 4.2% on that cash to get the holdco to a positive carry situation. 

 

but while a significant positive carry would be welcome, is it not the driver of valuation creation here, it's about the gaping disparity between current price and the current sum of the parts at fair value and the rate at which the investments grow.  no one was trying to peg a price to FCF multiple on the BRKA holdco back in the early days.

[samwise]

Thanks. Hopefully they can get there with the PLM dividends. In fact if the crises ends soon enough, just the recap will significantly help. I am not worried about a FCF multiple but agency costs.

 

BRK, Leucadia, are good examples. I also remember the early days of HCHC and SPLP. or Biglari. So the outcome depends on the skill and intent of the people in control.

[Dr. Aybolit]

very true on the negative examples, BH being by far the most egregious, followed by HCHC, and SPLP a very distant 3rd worst.

 

what they all did wrong?

 

1) debt at the holdco. 

 

2) absolutely outrageous comp on absolute and relative basis (vs. size and performance or lack thereof) (would exclude SPLP from this one), and/or self-dealing (SPLP probably back in on this one).

 

3) sycophant boards enabling it all.

 

none of that going on here. 

[kab60]

I like the setup and Mittlemans way of investing, although he's been hitting one disaster after another in recent years. But I still don't get the 15m in holdco costs. Shouldn't this be a five man team plus some public costs? What's the right multiple on those HQ costs?

[Dr. Aybolit]

they mentioned on the call that further cost cuts were targeted at HQ, although no indication of amount or timetable, so maybe it gets down to C$13M / US$9.3M ( the Alexander Capital report mentioned C$13M as a mgmt est. of minimum HQ cost). 

 

seems reasonable to pay for a public co. board of directors, their D&O insurance, finance, tax, legal, HR, IR, IT, C-suite, admin, audit, rent, listing maintenance. 

 

maybe capitalize that at 5x because it shouldn't grow much if at all i would think in near term, while growing much more slowly over the long term than the hopefully growing dividend flows it receives.

 

so corp. costs (excluding severences, etc.) go from C$41M in 2018 (activists join BOD in Apr. 2018) to C$25M in 2019 to C$13M-C$15M in 2020.  decent progress.

 

 

[samwise]

Another Mittleman holding is going private, with the management and owners rolling their equity into private shares. Maybe Mittleman does the same thing with VRL now. (It's Aussie theme parks and cinemas. )

 

BTW its a good way if someone wants to make a bet on theme parks reopening. the bid is (from memory) 2.20 + 0.10 if parks reopen in time, +0.08 if cinemas reopen in time.

 

Oh on value creation by smart owners of loss shells, I should have mentioned the Canadian experience: Kingsway. Not going well so far.

[Homestead31]

some valid points raised about past abuses by holding companies... but money talks.  you have to give the insiders here credit: they continue to buy alot of stock in the open market.

[wabuffo]

For those pointing to LifeMiles.....ruh roh!

 

Moody's downgrades LifeMiles ratings to Caa1; negative outlook:

https://markets.businessinsider.com/news/bonds/lifemiles-ltd-moody-s-downgrades-lifemiles-ratings-to-caa1-negative-outlook-1029221491

 

Colombia Grounds Flights Through August in One of Strictest Bans:

https://www.bloomberg.com/news/articles/2020-05-20/colombia-grounds-flights-through-august-in-one-of-strictest-bans

 

Avianca Peru Ceasing Operations; To Enter Liquidation:

https://www.aerotime.aero/aerotime.team/25029-avianca-peru-ceasing-operations-to-enter-liquidation

 

As I said before, I don't think the examples of previous Chapter 11s are relevant to the current crisis.  Its one thing to be in Chapter 11 to deal with a debt restructuring, while revenues are close to 100% of what they were to pre-Chapter 11.  Its completely another case, when you are entering Chapter 11 while revenues are down 90-100%. There is a real chance that the loyalty program's principal airline sponsor has to completely liquidate and dissolve. 

 

But we'll see, I guess.

 

wabuffo

[Homestead31]

"Despite the Avianca Peru liquidation, routes to and from the country remain the group’s plans. "

[Dr. Aybolit]

the Avianca bankruptcy is instructive, but not in the way it was referenced here.  Avianca's 1st lien bonds, PFAVH 9% of 5/23, $484M, have traded down from $100 to $21 since the end of Feb. 2020.  LifeMiles $388M (paid down from $495M) 1st lien term loan of 8/22 has traded down from $100 to $81.  The market seems to be correctly valuing the best part of the airline business more highly, despite the end of days being upon us.

[wabuffo]

Aeromexico/PLM deal:

In an earlier post, I tried to summarize the key terms of the $100m loan from PLM to Aeromexico based on comments AIM mgmt made on their CC:

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....

 

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).

 

Now we get a release of the actual LOI:

The parties agree that [loan advance repayment amount redacted] of this advance will be repaid

(1) from the proceeds of the leveraged recapitalization transactions set forth in Section I.4(d) of this LOI or,

(2) if unavailable, through an additional advance purchase of award tickets under the facility described in Section I.4(b) hereof or

(3) otherwise as agreed in such amendment.

 

1 and 2 seem like important details that were omitted by AIMIA (they only mentioned pt 1 - in fact, none of the three options explicitly mention a cash payback at all, contrary to the implication left to the listener of the CC by AIMIA mgmt).  In effect, if I'm reading this right, Aeromexico has the option to "pay back the $50m loan portion" with more free seats provided to PLM or by crediting its future dividend recap money.  This is basically a PIK loan paid in free award seats (and/or the dividend recap).  Not at all the impression we were given.  There's no way Aeromexico defaults on this (so the security guarantee given by Aeromexico is worth bupkis - unless Aeromexico fails and liquidates)

 

If some folks here are so sure that loyalty businesses are highly valuable even when the underlying airline is in financial trouble (using Avianca/LifeMiles as the example), why not go straight to the dividend recap right now?  They could've taken the $110m in cash + another $150m in debt financed cash out now.  Aeromexico gets its cash now but so does AIMIA.  That would've been a better deal for AIMIA - and they probably could still have gotten the partnership extension, IMHO.  This move would've been much more accretive for AIM's stock price. Instead Aeromexico gets its dividend recap cash now (in effect) but AIMIA doesn't.  Good quarter guys! Perhaps - I'm missing some galaxy-brain strategery here by AIMIA's new mgmt team.

 

Kognitiv deal:

While I'm at it - let's also look at some drip-drip disclosures by AIMIA about the Kognitiv deal.  Again, on SEDAR there is a May 2020 investor presentation by AIMIA.  On p. 18, there is a cash-flow waterfall chart.  We were told about AIMIA's $21m convertible preferred investment in Kognitiv.  But I don't think mgmt ever told us about a FURTHER $29M is cash-related transaction costs that will be 'invested' into the transaction when it closes.  Suddenly, we're talking $50m of cash going out the door on a hope-and-prayer investment.  It makes me wonder if the whole biz could've been shut down for a lot less.

 

Perhaps I'm making mountains out of molehills - but I always worry when I feel the mgmt team is pumping up the positives, but burying the negatives - or perhaps, they are just sloppy negotiators.  I think these are important details and the fact that they were omitted in the press releases trumpeting the value creation makes me worry that this team is in over its head because it is rushing to get press releases out rather than negotiating for shareholder interests in a hard-nosed manner. (meet the new boss, same as the old boss).

 

Bill

[Dr. Aybolit]

I think maybe the reason Aimia gave AM such an accommodative deal is because AM needs the cash from PLM much more than Aimia does right now, and so maybe it means a stronger AM averts bankruptcy as a result, in an environment where Avianca and LATAM have already succumbed.  But getting AM to commit to a valuation floor of 7.5x EBITDA and US$400M minimum for Aimia's 49% stake in PLM, is a meaningful get versus the US$180M they (AM) bid for it less than 2 years ago, not to mention the 20 year contract extension (reversing AM's previously threatened stance that they sought to end it as soon as possible).  So Aimia gives a bit more right now to help its key partner during an unprecedented time of industry crisis, but gets rid of much of the uncertainty surrounding the value of PLM. I don't see that as a mockable outcome.  And while it's obvious a leverage recap would be ideal, the debt market probably not ideally receptive to such a deal at this moment.

 

and of the $29M additional drop in cash due to the Kognitiv transaction, the presentation slide on page 18 of the May 2020 presentation clearly states that $22M of that $29M was "restricted cash" which I imagine was mandated reserves for some deferred revenue that was integral to the operation of the businesses sold to Kognitiv, so that's not really incremental consideration paid given Aimia would likely never get access to use that $22M (unlike the remaining $65M in restricted cash related to Air Canada, which is expected to become unrestricted soon and thus usable by the holdco). So I don't see this as sweeping negatives under the rug, nor do I see the post-annoucement adjustments as unusual; for example they got Air Canada to agree to pay $450M for Aeroplan (up from the initial $250M bid), and that initially announced $450M somehow ended up at $516M by the closing (through various adjustments that could not be calculated at the time of the initial annoucement), so it can work both ways.

 

[wabuffo]

Thanks for your comments.

 

I see that LifeMiles debt is back to trading near par.  Frankly, $100m is marginal for Aeromexico given the size of their liabilities.  They could've done the dividend recap if they wanted to do.  In this low rate environment, PLM could've easily floated LIBOR+550 debt (which is basically what Aeromexico is "paying" for their loan advance) - given they have no other debt on their balance sheet.

 

Despite all the fancy press release language.  Here's the bottom line the way I see it:

- Aeromexico gets their dividend recap money early, while AIMIA gets to wait 2 years or more (and receives no other cash from PLM in the meantime after the dividend announced as part of the deal).  In return, AIMIA gets an extension to their PLM shareholder agreement.

 

Personally, I don't think the guarantee price means much since it is at Aeromexico's option and will expire after seven years. IMO, it was thrown in because the Mittlemans wanted it in the press release so they could point to it.  The extension of the agreement to 2050 is worth something though and a good thing.

 

On the Kognitiv deal, we'll have to wait and see.  It'll be interesting to see future marks from URB.TO after the deal closes.  They own some of the equity in Kognitiv in their portfolio. 

 

wabuffo

 

 

 

 

 

[Dr. Aybolit]

if they could easily do the leveraged recap now, as you claim, why then assume that Aimia "gets to wait 2 years or more" for it?

 

couldn't it happen before year-end?

 

i think the minimum valuation is very comforting to me and most investors who only months prior had been worried about litigation given the aggressive noises that were emanating from AM then, but you think it's puffery, i'm not surprised given the relentlessly negative slant of your prior posts, which i find odd for someone who claims to be long the stock.  i think it's substantial progress.

 

[wabuffo]

if they could easily do the leveraged recap now, as you claim, why then assume that Aimia "gets to wait 2 years or more" for it?

 

I honestly don't know why - Aeromexico's $100m receivable to PLM could be "paid back" and PLM could take on $200m in debt and issue a $100m dividend to AIMIA.  They would still have $160m in cash ($170 - 110m(Aeromex +divie) + $200m new debt - $100m to AIMIA) and $200m in debt.  Someone should ask the question. Why is AIMIA waiting around for their dividend?  Its a bad look for Mittleman.  If Aeromex and PLM recover then they could do a second tranche of $200m.

 

LifeMiles took on $500m in debt and has similar levels of revenue as PLM (though they appear to be more profitable than PLM). 

 

wabuffo

[Dr. Aybolit]

what's more important for Aimia, adding to their cash pile right now, or getting the best interest rate possible on the term loan PLM will issue to fund a leveraged recap?  what's the rush?

[wabuffo]

Uhhh - maybe when they issue the all-clear a few years from now, equities will go back to being waayyyyy overvalued?  There’s probably a reason smart investing shops are opening up right now to new investors (after being previously closed to new money).

 

But what do I know...

 

wabuffo

[Cigarbutt]

News is out that Air Canada is trying to block the Kognitiv merger.

Why would they want or need to do that?

Couldn't this have been prevented pre-announcement or is this business as usual?

Maybe Aimia could temporarily lend money to Air Canada in exchange for dropping the case?  ::)

 

[Dr. Aybolit]

my point about not needing to rush is that Aimia still has C$190M (C$118M unrestricted) in cash remaining, so they could do a C$300M to C$400M LBO with that, or maybe buy a foothold in a public stock for C$50M to C$100M, if they had a compelling opportunity tee'd up, like the C$75M they just invested in Clear Media (100 HK). 

 

re: Air Canada suit, I have no idea.  I don't see how or where Kognitiv would or could compete with Aeroplan. 

[wabuffo]

https://www.newswire.ca/news-releases/aimia-announces-normal-course-issuer-bid-to-repurchase-up-to-6-98-million-shares-834002288.html

 

 

wabuffo

[Homestead31]

 

News Releases

Aimia Announces Sale of Recently Purchased Public Market Securities

TORONTO, June 9, 2020 /CNW Telbec/ - Aimia Inc. (TSX: AIM) announces that it has successfully completed the sale of its entire diversified portfolio of publicly-traded equity securities, resulting in a substantial gain for stakeholders.

 

 

 

Hard to argue with a management team and board who have the ability to be opportunistic like this.  Not huge dollars or anything, but i think it speaks to having skin in the game and not having a culture based on thumb sucking like so many companies out there.