AIM.TO - Aimia

[Saj]

Agreed. Very positive report today. Now just need mgmt to execute by replacing AC with something reasonable over the next year or two.

[Cigarbutt]

A benign redemption pattern is reassuring. For now.

I submit that management is walking on a tight rope.

They need to translate this "sense of urgency" into tangible and material results.

 

I still think that the best way to preserve value is to negotiate with Air Canada.

They seem to try building some kind of negotiating leverage but my opinion is that they have to realize that they are no longer in the driver's seat.

 

Will watch this very closely.

 

I did some research on potential multi-airline partnerships. Options are there but seem to be limited for a variety of reasons.

Any thoughts?

 

[StubbleJumper]

No sign of a run on the bank so far.

 

 

So far so good. 

 

The spouse and I have begun the process of aggressively burning down our Aeroplan miles.  By this time next year, I expect that we'll only have scraps remaining in our accounts.  Of course, this means that I'll be "forced" to take three trans-Atlantic vacations over the next 12 or 13 months...

 

I would say that consumers in Canada are just not that astute and are unaware that their Aeroplan miles will quite likely be heavily de-valued in the next five years.  The fact that nobody is rushing to the exits is a real plus for AIM.  IMO, they need to implement a devaluation of about 35% or so in the next three years...so, say about 10% per year for three consecutive years.  Reality will hit home in 2020 when AC launches its own frequent flyer programme and consumer will no longer get miles for AC flights.  Those who are currently blissfully unaware will be in for a shock when they can no longer accumulate points from flights.  If everybody rushes to the exit at that point, at least the liability might have already been significantly haircut.

 

In the mean time, AIM has an excellent opportunity.  They have about $450m of bank debt and notes outstanding, which is only about two years of FCF.  Perhaps in August 2019, they'll have no cash-debt outstanding (but precious little prospect of renewing their credit lines).  At least they'll have a prayer of remaining a going-concern.

 

 

SJ

[Cigarbutt]

Thinking out loud.

 

Just looked at Club Premier (PLM joint venture) in some detail.

 

-Comment about loyalty management industry dynamics.

 

Air Canada let go of its frequent flyer program because it had to. Most airlines kept their programs in house. Ways to maximize/capture value continues to be put into question in this field.

 

The expansion of the AC frequent flyer program into a broader coalition has created value. The Club Premier story since 2010 shows the same trend.

 

-The Club Premier joint venture

 

Aeromexico has remained the owner and the operator of the venture but Aimia has a 48,9% interest and has “joint control”. Interesting.

 

Aimia, since 2010, has built its 48,9% in tranches with total contribution of 124,2 million USD. Since 2012, Aimia has received cumulative distributions for a total of 84,3 million USD. In 2015, an IPO for Club Premier was rumored for 2017 with potential value of 1 billion USD. Club Premier is growing profitably and now has more than 5,1 million active members. The valuation mentioned before appears relatively generous but it would be fair and conservative to now value Aimia’s share of this investment at 300 to 400 million USD. This has been a great investment for Aimia even if they are not in the driver’s seat.

 

For reference (2012)

 

https://www.aimia.com/content/dam/aimiawebsite/CaseStudiesWhitepapersResearch/english/ClubPremier_CaseStudy.pdf

 

-So what’s the point?

 

Many scenarios can play out:

 

-Airline buys Aimia

-Club Premier IPO

-Aimia finds alternatives +/- with multi-airline arrangement

 

Air Canada now is well positioned from a negotiation standpoint but could lose some feathers as developing a FFP takes time, is associated with risks and development of a wider coalition program is even more complicated.

 

I submit that the most rational scenario implies preservation of the Aeroplan brand with maintenance of the Air Canada partnership.

 

My opinion is that the best way to achieve this is through the formation of a joint partnership with Air Canada. Air Canada could obtain +/- 51% ownership of the new Air Canada/Aeroplan entity. This would maximize the collaboration of competing interests. Also, a solid partnership would strengthen the long term arrangements with banks and would help to recruit large scale redeemer partners such as grocery chains and others. In present circumstances, Air Canada should control an entity driving a frequent flyer program and the best partner is Aimia. Obviously, everything has a price. There is no clear template for this and many models could be used. Using many historical inputs and many variables, I come up with a price tag for AC of +/- 850 million CDN $ for the transaction.

 

I submit that this scenario would be a fair win-win for both, could be achieved rapidly and clearly would clarify Aimia’s future in its capacity to continue as a going concern.

 

[petec]

Am I reading this deal correctly, that Aimia held the Air Miles royalty and therefore received royalty payments from its major competitor?

 

Nice way to reduce a bit of debt.

[Cigarbutt]

This was an asset that had been acquired as part of the LMG acquisition in 2007-8, consisting of the worldwide "Air Miles" trademark (brand, logo etc). That was when the sky was not the limit (from the annual report cover).

 

The royalty stream sold is the Canadian component of this asset. Before, this was included in "other revenues" and likely was not matched to any material expense. So, we're told, 8,5 million coming in per year on average. My opinion is that this is likely to grow slightly over time and possibly grow faster than inflation for at least a while. Premise: I think Air Miles in Canada has a future.  How much would you pay for that?

 

From the buyer's perspective, Diversified Royalty Corp, they seem to have a paid a lower multiple compared to previous acquisitions of royalty streams with a similar profile.  This deal is even more advantageous for the buyer if you consider that the contingency part of the acquisition is equivalent to interest free loans over two years.

 

From a balance sheet strength (one of the three pillars of the new vision based on a "sense of urgency) point of view, the transaction makes sense. However, the price obtained seems low and includes a financial distress component. Also, I would assume that there is likely some buyers for this stable and slowly growing royalty stream? Did they offer it to LoyaltyOne, the owner of Air Miles Canada?

 

So, I like the cash balance to grow but I wonder about the timing. Maybe they are just aiming for a solid balance sheet? Or is it uncertainty related to the UK Sainsbury (anchor partner) contract renewal?

 

But the sky has now fallen and they need to show progress on the main front, the fate of Aeroplan.

[petec]

Agreed that the price didn't look great.  But as a pref holder I think I prefer the lump sum which hopefully promotes me up the capital structure a bit.

 

You imply they still have the rest of world Air Miles rights.  Is that so?

[Cigarbutt]

My understanding is that they still have the international rights.

Their Middle East operation uses the Air Miles trademark.

The brand is also used in the Netherlands and in Spain (?).

In the UK, it seems that the Air Lines brand is no longer around as British Airways changed it to "Avios".

 

Any insight on the Nectar program ie market penetration, brand recognition, satisfaction with points collection and redemption?

[Cigarbutt]

Give limited value to people who agree with investment ideas and prefer polite attempts to kill the thesis.

But interesting to note that Mittleman Brothers have recently built a more than 10% stake in the common share ownership of AIM.

 

Looked into this and like what I see. They seem to be long term oriented, value based and may get "involved" for what seem to be valid reasons.

Anybody know them in a material way?

 

I especially like the fact that more concentrated ownership may help to inject some clarity of purpose.

[petec]

Any insight on the Nectar program ie market penetration, brand recognition, satisfaction with points collection and redemption?

 

No, not really.  I was a Nectar user about a decade ago with an Amex card, but didn't have a Sainsbury's close by and kept nearly running out of fuel waiting till I found a BP service station ;)  Plus frankly Amex wasn't that widely received and so when my bank set up its own points system on MC credit cards I switched to that.  Interestingly they have since closed that and moved to cashback instead - same value to the consumer and a lot less hassle?  I am now on Avios because I travel a lot with work (and back with Amex as a result, which is more widely accepted now). Avios is a fairly low grade system (very poor reward flights availability) but it's a no-brainer for me because of the work flights.

 

My overall view is that these systems don't represent better value than cashback on card spend UNLESS they have a deep discount relationship with a key provider.  A supermarket or petrol station will never give deep discounts - the only businesses that can do that are ones whose marginal cost is tiny.  It makes sense for an airline to virtually give away empty seats in return for customer loyalty; it does not make sense for Sainsbury to give me my shopping in return for customer loyalty. 

 

My view is that Nectar is a good mid-low end reward scheme: millions of members getting to whom small savings are important, and big mass partners who get some loyalty benefits. But because the savings are small and the loyalty benefits aren't huge, the margins are low.  The entire system has economic value, but less than it would if the anchor partner could give real discounts at no cost in return for real loyalty.

 

The best system of all, of course, is one in which party one (employer) pays for flights chosen by party two (employee) who gets points to spend on cheap flights in return for loyalty to party three (the airline).  This is a wonderful case of misaligned incentives which allows for big margins for party four (the loyalty scheme owner)!

[petec]

Give limited value to people who agree with investment ideas and prefer polite attempts to kill the thesis.

But interesting to note that Mittleman Brothers have recently built a more than 10% stake in the common share ownership of AIM.

 

Looked into this and like what I see. They seem to be long term oriented, value based and may get "involved" for what seem to be valid reasons.

Anybody know them in a material way?

 

I especially like the fact that more concentrated ownership may help to inject some clarity of purpose.

 

Good spot.  They have very good performance since inception.  And yes if they are activist then things could get very interesting.

 

Prefs are back around my in-price, which I find oddly satisfying since I felt when I bought them that they were a good value even if AC pulled out!  No doubt it will be temporary but I think I am in this for the long haul. 

[Cigarbutt]

For those still following, there is a new write-up floating around.

 

https://seekingalpha.com/article/4104139-aimia-blood-streets

 

Again, at this point, I would prefer to spend time trying to kill the thesis instead of pseudo-confirmation.

 

Looked at this in some detail.

 

The author essentially describes a very bullish pretty much best scenario analysis.

 

Also, he puts the focus on the sum-of-the-parts approach.

 

My assessment is much more conservative.

 

  -I more or less agree with the equity investments fair value, in total, because, contrary to the rest of the report, I find that the value of PLM is more than stated. PLM is very good business with good prospects. However the other analytics businesses are probably only useful in the sense that they provide value to the other coalition programs within Aimia. On their own, they may have little or no free cash flow potential especially if sold separately. The Cardlytics sub though may have value on its own. In total for this aspect, I had put 350-450 million value.

 

  -I used more conservative assumptions for the present value of FCFs until 2020.

 

  -I put a value of 0-350 million for the international coalitions as there is potentially a risk of non-renewal with Sainsbury.

 

  -I put 0 value on the GLS part as this sub has struggled considerably in recent years.

 

  -The Aeroplan sub remains the hardest to value, as it really depends on outcomes. Without anchor airline partner(s), I feel that the adjusted EBITDA would be +/- decreased by 75%.

 

Using a sum-of-the-parts approach, even with very conservative assumptions, the preferreds still appear to be the fulcrum security. If you accept the generous assumptions, then some will hit it out of the park.

 

The author, however, assumes that the Sainsbury renewal is in the bag, that management will realize the value of the assets until 2020 and beyond and does not really factor in an eventual run on the points.

 

Using a cash flow perspective for a firm in distress, one has to consider that the enterprise value may end up corresponding to the low end of the sum-of-the-parts valuation.

 

I continue to think that the clock is ticking, management still needs to show that they can manage the transition and the earlier the better.

 

[petec]

Thanks Cigarbutt!

[NewbieD]

Is there any difference to dividend rights in the A, B, C prefs?

[Uccmal]

I no longer have any position in this but do have an update for those who do. 

 

This past week TD Bank has started their own rewards program.  I have a 'normal' TD credit card. 

 

They have enrolled my card automatically in their rewards program.  I already have 92 points.  Not sure what I can do with them yet. 

 

Just an FYI. 

[Cigarbutt]

Sold everything.

 

The investment thesis was based on:

 

-Management capability

This is still a question mark for me, especially if you're looking at the new alternatives scenario and model transformation.

-Value of loyalty programs

Loyalty programs will continue to have value but the moat is somewhat conditional on the renewal of key partner contracts.

-Aeroplan value

The preservation of the brand was largely based on the possibility of a new adjusted arrangement with Air Canada. That may still be in the works but I see risks that positions become entrenched.

-The preferreds as a margin of safety position

The way I see it, the odds are increasing that the lower bound of value may be tested.

 

So, quite a decent return over a weighted period of about four months but result explained maybe 1+ because entry points were opportunistically quite low and especially 3+ because of positive "momentum" during the period.

So, I won't put this in the success file.

 

Will keep following. Good luck for those who hang on.

[petec]

I no longer have any position in this but do have an update for those who do. 

 

This past week TD Bank has started their own rewards program.  I have a 'normal' TD credit card. 

 

They have enrolled my card automatically in their rewards program.  I already have 92 points.  Not sure what I can do with them yet. 

 

Just an FYI.

 

Interesting. Years ago I had a Nectar card. When my bank rolled out their own rewards scheme I canned Nectar and collected bank points. Eventually the bank binned its points scheme in favour of a cashback system - cheaper to administer and more attractive for consumers. This underlines my main worry about these companies: everyone would actually be better off if interchange fees were lower and prices were lower. The points are basically a (regressive) scam - EXCEPT when the rewards are available at zero marginal cost (like airline seats) and giving them away engenders loyalty. In that case everyone's a winner. I wonder about the sustainability of the scam side of the business.

[petec]

 

-The preferreds as a margin of safety position

The way I see it, the odds are increasing that the lower bound of value may be tested.

 

Why's that?

 

I bought the prefs at around the current price, thinking they were far too cheap if AC renewed and probably money-good if they did not. Clearly that thesis has been tested more than I wanted! I'm now struggling over whether to declare victory (everything went tits up and I didn't lose money) or hang on in the hope that the other assets cover most of the pref, the value of which is theoretically increasing with every accumulated dividend.

[kab60]

 

-The preferreds as a margin of safety position

The way I see it, the odds are increasing that the lower bound of value may be tested.

 

Why's that?

 

I bought the prefs at around the current price, thinking they were far too cheap if AC renewed and probably money-good if they did not. Clearly that thesis has been tested more than I wanted! I'm now struggling over whether to declare victory (everything went tits up and I didn't lose money) or hang on in the hope that the other assets cover most of the pref, the value of which is theoretically increasing with every accumulated dividend.

That was pretty much my reason to go with the prefs as well. Sold for a small loss and actually thought it was a pretty good deal since it went tits up and the loss was small. Anyway, in the current case, I don't like the prefs. I think it is hard to handicap the odds, but upside is capped, and there is little equity buffer if things turn south. No position but I think the common is more attractive now.

[Cigarbutt]

Why?

It's mostly a question about margin of safety.

 

With Aimia, my take is to value the firm using a weighted probability of scenarios. Basically, how the stock and prefs (to a lesser degree) behave more or less matches how you value the option of success to manage the transition.

 

I think that would explain why kab60 comes up to the conclusion that the common may be more attractive.

Based on the above description of valuation for this specific investment, I come now to a different conclusion.

 

If, somehow, the partnership with AC is renewed (less likely as time passes) or Aimia can successfully set up (risks) a renewed platform with other partners, then exposure to prefs or commons will be a winner. My take is that the odds here are getting lower that they will successfully realize the above.

In my first post on this, I submitted that the most likely scenario, in terms of valuation, if Aimia tries to develop a new platform without a preferential link with AC, would be +/- 75% decrease in value of the Aeroplan brand.(my opinion with +/- emphasized)

 

Working with those assumptions, I submit that, on a weighted scenario basis, enterprise value now approximates market value now for the prefs.

So the prefs have lower upside and a whittling margin of safety.

Add to that the uncertainty related to the key Sainsbury renewal coming up.

 

I respect that others may disagree.

 

[Cigarbutt]

For those following and/or still holding.

 

-A recently released report by a relatively large shareholder:

https://www.docdroid.net/dN7Ue02/mittleman-q3-2017.pdf#page=6

 

-Would like to add that I disagree with one of their premises which is that Aimia is a float type business much like Blue Chip Stamps. Aimia may have the ability to generate float going forward but, from my understanding, contrary to Blue Chip, Aimia no longer has the accumulated float from the past as it has already been distributed mostly to shareholders. So I submit that your thesis has to rest on the going forward capacity to generate float only.

[Uccmal]

I think the existence and durability of float in this type of business is overstated. 

 

Buffett basically put Blue Chip into runoff fairly quickly (for pre-internet times),and redeployed whatever cash he could get out of it elsewhere.  Compared to Blue Chip in the 1970s things move at lightspeed today. 

 

Every Canadian Bank is promoting its own loyalty programs including TD, which has aeroplan cards.

 

I dont see the programs anywhere else being any better protected than Aeroplan is/was.  If we completely write off aeroplan, maybe there is value left in the other brands, but how much?  That is the big unanswerable question.  To my mind the market is probably efficiently reflecting the actual business value ex. aeroplan.  To that end the common stock is dead money for years to come.  What the guys are hoping for is a big turnaround in fortunes.  Hope is not a good basis for investing a large chunk of your funds net worth in.  Aimia would have mad it into Walter Schloss' portfolio as a 1% holding. 

 

When you assess the value of an unnecessary commodity you really need to handicap to the downside.  In todays market so- called value investors are moving way down the quality curve and subjecting themselves to huge unnecessary risk. 

[petec]

For those following and/or still holding.

 

-A recently released report by a relatively large shareholder:

https://www.docdroid.net/dN7Ue02/mittleman-q3-2017.pdf#page=6

 

-Would like to add that I disagree with one of their premises which is that Aimia is a float type business much like Blue Chip Stamps. Aimia may have the ability to generate float going forward but, from my understanding, contrary to Blue Chip, Aimia no longer has the accumulated float from the past as it has already been distributed mostly to shareholders. So I submit that your thesis has to rest on the going forward capacity to generate float only.

 

Thanks and FWIW I agree on float. Aimia made two key errors: allowing AC to sell its majority stake (which could have been prohibited in the original agreement),and paying out its float. Combined, these two decisions represent huge risk to common shareholders.

 

I can't make the link work. You don't happen to have a copy of the report, do you?

[Cigarbutt]

Maybe, you want to try this:

http://www.valuewalk.com/2017/11/mittleman-brothers-letter/

 

Q3 results are out.

+/- more of the same. PLM continues to grow.

[sculpin]

 

http://adventuresincapitalism.com/post/2017/11/10/Most-Canadian-PMs-Have-Crappy-AIM.aspx

 

Seems pretty damn cheap at ~$3 now, it's mostly de-risked after earnings, management seems to be doing the right things and buyers seem to finally be waking up to the above facts.