AIM.TO - Aimia

[wabuffo]

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

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

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

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

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

wabuffo

[Dr. Aybolit]

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

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

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

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

[Cigarbutt]

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

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

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

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

2-The 73M net obligations part
If your redemption liability assumption holds, the purchase price paid by Air Canada (450M) makes no sense and should have been a multiple of that. The purchase price was this low (in the end) because AC had to assume a disproportionate amount of liabilities versus the underlying cashflow generating entity. Redemption liabilities can be discounted but not to zero, especially when a change of control is contemplated. When loyalty units are valued and transacted, this aspect is not necessarily discussed or explicitly stated and may be incorporated into a standard EV to EBITDA measure but IMO it needs to be taken into account. FWIW, I agree with their PLM valuation (range for a transaction with Aeromexico) and, in my calculations, a discounted liability amount was allocated for the necessary build-up of capital in correlation to growing redemption liabilities and gross billings.
I have a table with numbers but to summarize and taking the template of results from 2012 to 2019 and using the growth assumptions described until 2030, here are the inputs: in 2030, GB should be up by a factor of about 1.2, an expected ratio of total liabilities (as a proxy for redemption liabilities) to GB is maintained at about 1.4 to 1.5 and an expected ratio of total liabilities to total assets (as a proxy for 'float' maintained on the asset side) is maintained at around 1.4. Their valuation multiple is based on EBITDA and not free cashflow and IMO adjusting for the EBITDA cashflows going to the proportional float build-up can be justified. With these inputs, I did not exactly land on the discounted 73M USD but slightly fudging the numbers allowed to reach the exact amount (!).
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The roster of actors was always a concern and recent developments have not helped. One thing I find concerning about the report is that the rationale behind the common buyback, using a conservative appraisal of underlying assets, only makes sense if the liquidity oppression is maintained and if faith is allocated to what is coming next. The margin of safety continues to dwindle.

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

[Dr. Aybolit]

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

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

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

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

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

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

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

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

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

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

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

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

Happy Thanksgiving to all.   

- Dr. Aybolit

[Cigarbutt]

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

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

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

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

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

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

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

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

Nice reply.

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

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

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

                                   2015            2016            2017            2018            Q1-Q3 2019
TD/TA LifeMiles              0.9               0.9               2.2              3.5                   3.5
TD/TA PLM                     1.5               1.5               1.3              1.3                    ?

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

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

[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.