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
