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General Category => Investment Ideas => Topic started by: txfan2424 on May 24, 2016, 06:57:12 PM

Title: AIM.TO - Aimia
Post by: txfan2424 on May 24, 2016, 06:57:12 PM
Has anyone spent time on this? 10% div yield; 12% FCF yield. Mexico JV is going public at rumored $1B valuation (AIM owns half and AIM's own EV is $1.5B).

Seems very cheap.
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on May 24, 2016, 07:48:56 PM
Yes, and I would focus on the preferreds: more yield, similar upside, less risk.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: sculpin on May 24, 2016, 09:19:58 PM
 
AIMIA | AIM-TSX | price C$8.23 | Outperform
Estimates revised.  Maintain C$15.00 target price.
Adj. EBITDA (mln):  2016E C$236 to C$234         2017E C$256 to C$255
Mkt Cap (mln): C$1,257                                       Net Debt (mln): C$733                         Yield: 9.1%
AIM: 1Q16 Results; Short on (British) Gas, Long on Dividend
Kenric S. Tyghe, MBA | RJL | 416.777.7188 | kenric.tyghe@raymondjames.ca
Summary:
♦         While the results were below consensus of $55.8 mln (on adjusted EBITDA of $50.6 mln), we expect investors to look through the miss (given its attribution).
♦         We believe that the 5% dividend increase is well supported given the performance of the Aeroplan program and our belief that fears around refinancing risks are at odds with realities of the FCF generation and balance sheet strength of AIMIA.
♦         The Aeroplan program's performance, specifically the financial card partner billings growth and strong engagement, were key positives in the quarter, in our view.
♦         Aeroplan's absolute (and relative) loyalty value proposition delta continues to widen, with a recent change to allow use of Aeroplan miles for taxes and fees.

AIMIA May 16, 2016
AIM-TSX Company Comment
Kenric S. Tyghe MBA | 416.777.7188 | kenric.tyghe@raymondjames.ca
Krisztina Katai (Associate) | 416.777.7060 | krisztina.katai@raymondjames.ca

Consumer & Retail
1Q16 Results; Short on (British) Gas, Long on Dividend

Recommendation

We reiterate our Outperform rating on AIMIA following 1Q16 results. While the
results were below consensus of $55.8 mln (on adjusted EBITDA of $50.6 mln), we
expect investors to look through the miss (given its attribution) and focus on the
5% dividend increase (and the implicit messaging of the increase). The Aeroplan
program’s performance was solid (given the comps and macro dynamic), for flat
loyalty unit revenues, with credit card partner billings increasing and very healthy
engagement (as highlighted by the burn ratio). The International segment was the
largest driver of the miss on a 7.6% decrease in gross billings, which was driven by
the Nectar Italia exit, the shift to bonus miles at Sainsbury’s (seasonal bonus
volatility) and regulatory changes impacting British Gas. The Sainsbury’s dynamic
was a $15 mln billings headwind with British Gas a further $10.0 mln (of the total
expected $30 mln 2016E impact) drag. In addition, AIMIA incurred $4.0 mln (of the
total expected $10 mln transition cost) relating to the HP outsourcing agreement in
1Q16. We believe that the 5% dividend increase is well supported given the
performance of the Aeroplan program and our belief that fears around refinancing
risks are at odds with realities of the FCF generation and balance sheet strength of
AIMIA. We are buyers at current levels.

Analysis

 The Aeroplan program’s performance, specifically the financial card partner
billings growth and strong engagement, were key positives in the quarter, in our
view. We have long been of the view that macro-driven concerns on credit card
billings growth are misplaced, which both industry and AIMIA results served to
reaffirm in quarter.

 Aeroplan’s absolute (and relative) loyalty value proposition delta continues to
widen, with a recent change to allow use of Aeroplan miles for taxes and fees. The
combination of markedly increased seat availability, access to front of the plane (and
line), and now using miles for surcharges is in our view particularly compelling.

 With the noise and (new) seasonality in the Nectar numbers, we believe that
investors should look through the 1Q16 miss (which was led by Nectar). The reality
is that not only was Nectar UK lapping the old base driven Sainsbury’s model (the
reset occurred in April 2015), but also accumulation was continuing in Nectar Italia.

Valuation

Our $15.00 target price is based on the average of a 12.0x multiple on our 2016E
adjusted EBITDA and an 8.0% FCF yield. Despite current market dynamics, our target
multiple is in-line with its loyalty and transaction processing peer group average of
12.0x, which we believe is warranted given AIMIA’s global loyalty positioning.
Title: Re: TSX:AIM - Aimia
Post by: SafetyinNumbers on May 25, 2016, 04:47:22 AM
Is there new speculation on IPO timing for Club Premier? The last I read was in 2015 for an IPO event in 2017.
Title: Re: TSX:AIM - Aimia
Post by: txfan2424 on May 25, 2016, 10:31:11 AM
Still a 2016/2017 expected event.

Preferreds are interesting but don't like that they're perpetual. If there were a way to compel management to refinance the prefs, it would make them very very interesting.

Title: Re: TSX:AIM - Aimia
Post by: Cardboard on May 25, 2016, 12:34:28 PM
If you want to gauge the interest of investing in the preferreds instead of the stock, just take a look at the preferreds of DC.A and CF. Once some uncertainty was lifted, they matched or outperformed the stock.

AIM preferreds are the last case of fixed rate reset preferreds and floating preferreds that have not rebounded following last Fall debacle and the secret of these things is out. I expect a very strong rebound even if the company's results remain stable as soon as something positive happens. They trade like the company is going bankrupt.

Actually, oil at $50 is already a big positive since a lot of the weakness in Aimia is due to fear related to Western Canada travel.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: Vanshon on May 28, 2016, 05:21:50 AM
http://www.theglobeandmail.com/globe-investor/inside-the-market/aimias-share-price-collapse-could-be-good-news-for-long-term-investors/article30193984/

Good article summarizing the current thoughts about Aimia.
Title: Re: TSX:AIM - Aimia
Post by: txfan2424 on May 31, 2016, 09:56:15 AM
Care to post the article? It is behind a pay wall.
Title: Re: TSX:AIM - Aimia
Post by: gokou3 on May 31, 2016, 08:04:49 PM
Have been following this for a while.  I guess one fundamental question is how competitive is the Aeroplan program?  I am shopping for a new credit card recently and discover that Elite" Mastercards from various issuers (BMO, MBNA, Capital One) offer 2% cash back on all purchases.  Capital One even offers a $400 welcome bonus.  The redemption process is very flexible too.

By comparison, the best Aeroplan card I found, from TD, pays 1.25 miles per $1 purchase.  Not sure if that translates to a 2% reward value for air tickets, but for gift rewards the value is closer to 1%.


Title: Re: TSX:AIM - Aimia
Post by: MrB on June 07, 2016, 10:05:03 AM
If you want to gauge the interest of investing in the preferreds instead of the stock, just take a look at the preferreds of DC.A and CF. Once some uncertainty was lifted, they matched or outperformed the stock.

AIM preferreds are the last case of fixed rate reset preferreds and floating preferreds that have not rebounded following last Fall debacle and the secret of these things is out. I expect a very strong rebound even if the company's results remain stable as soon as something positive happens. They trade like the company is going bankrupt.

Actually, oil at $50 is already a big positive since a lot of the weakness in Aimia is due to fear related to Western Canada travel.

Cardboard

CB, why do you think Burgundy is getting out?
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on June 07, 2016, 06:07:35 PM
They held 12.1% per the latest Management Circular. Where did you see that they were getting out? If so, maybe that they are switching to the preferreds? LOL

Looking at the chart, they must also be contemplating some heavy losses unless they bought most of their stake close to recent lows.

For their real reason to sell (is it trimming?) you would have to ask them.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: MrB on June 08, 2016, 04:50:31 AM
See attached
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on June 08, 2016, 08:24:02 AM
Right, so they have not sold a share since March 14 or the date of the Management circular for the AGM. I have not seen any insider trade from them since then (for which they would qualify being above 10%).

12.1% of outstanding is still a heck of vote of confidence IMO.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: Nelson on June 10, 2016, 02:28:10 PM
I bought the Series 3 (AIM.PR.C) prefs today at $14. Locked in 11.2% until the reset in 2019.

This reminds me a heck of a lot like the Dundee and Canaccord pref situations over the last few months. There's no way I should be getting 11% on an Aimia pref. The company generates plenty of free cash flow and has cash in the bank. Management has also been smart to really buy back shares when they've been low. Sure, they got in a little too early, but we've all made that mistake before.

Aimia reminds me a lot of the insurance business. Miles that have been bought but haven't yet been redeemed are a lot like insurance float. The bigger Aimia gets the bigger this float will become. I like float. I really like float plus a stock that trades at between 6 and 7 times forward free cash flow.
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on June 10, 2016, 03:42:53 PM
I own some "C"s as well but, the "B"s is my larger position. The current distribution, plus the gap to catch to the "A"s into which they are convertible in 2020 gives them roughly a 12% overall yield.

Their current yield is 10.3% which is enormous for a floater. You still give up a bit of current income vs the "C"s but, you also have larger upside to reach par if some sort of corporate transaction occurs.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: SafetyinNumbers on June 10, 2016, 06:50:56 PM
The B's are definitely the better value and as Cardboard said you have more capital gains upside, not only from a corporate transaction, but also when the C's reset and the dividend amount between the two classes tightens. I also prefer capital gains to dividend income.
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on July 07, 2016, 03:00:18 PM
So apparently Aimia's current deal (CPSA) with Air Canada grants them access to 8% of AC's seats at a special discounted rate.  Anybody have an idea how big this discount is?  I'm trying to figure out what Aimia's cash flows will look like under a renegotiated deal when the current one expires mid-2020.  New terms won't be as good - question is how much worse.

Has anyone ever seen the current CPSA?  I can't find it anywhere.
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on July 07, 2016, 04:51:20 PM
I have not seen it. I assume it is confidential or if disclosed, must be under the headline Material Contract on Sedar whenever it was signed.

While there is a risk that this might get negotiated negatively for Aimia, I do believe that the risk of a major cut is small as Aeroplan is a key partner for Air Canada that effectively cannot be replaced.

However, why bothering with the stock when you can buy AIM.PR.B below $10 right now?

Just look at the total amount paid in dividends to the common vs all dividends paid to the 3 series of preferreds. Then think of the fact that you are ahead of them in the capital structure. The risk for dividends to not be paid on the preferreds is very small IMO and would require a massive breakdown in the business which Brexit and this new deal cannot do.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: sculpin on July 08, 2016, 07:28:43 AM
So apparently Aimia's current deal (CPSA) with Air Canada grants them access to 8% of AC's seats at a special discounted rate.  Anybody have an idea how big this discount is?  I'm trying to figure out what Aimia's cash flows will look like under a renegotiated deal when the current one expires mid-2020.  New terms won't be as good - question is how much worse.

Has anyone ever seen the current CPSA?  I can't find it anywhere.

This is from an Oct 15 report from Industrial Alliance:

Air Canada Partnership is a Key and Secured Driver to Aimia’s
Success

Event

The Commercial Participation and Services Agreement (“CPSA”) between Aimia
and Air Canada (AC-T, Not Rated) is up for renewal on June 29, 2020. We
examine the relationship between the two organizations and explain why we
remain convinced in the ongoing mutual benefit.

Highlights

 Aeroplan and Air Canada make a good team – Air Canada, with its Star
Alliance partners, is Aeroplan’s largest Redemption Partner. Conversely,
Aeroplan is Air Canada’s largest single customer. The partnership makes Air
Canada more competitive through attractive pricing which helps increase
the airline’s market share in a challenging leisure travel market. In 2014,
~71% of all rewards claimed by Aeroplan members were for air travel.

 Air Canada is a net beneficiary of payments – While Air Canada provides
approximately $250M per year to Aimia to purchase Aeroplan Miles to
reward its frequent fliers, Aeroplan purchases tickets on Air Canada flights
worth approximately $540M per year.

 Aimia will benefit as Air Canada grows Rouge – The expansion of Rouge
will only further contribute to Gross Billings, especially since Air Canada has
shifted Rouge’s fixed Miles allocation to the percentage format used by the
rest of Air Canada.

 The 2020 CPSA renewal will likely result in a $ based reward vs. distance
– As we see occurring in other airline loyalty programs, we would expect to
see Air Canada modify its reward system to base Aeroplan Miles issued on
the price paid per ticket rather than distance flown.

Summary

Some investors have expressed concern over the approaching June 29, 2020 renewal date between Aimia and Air Canada
(“AC”) of their Commercial Participation and Services Agreement (“CPSA”). For AC, Aeroplan has only grown in importance
since being spun-out from the carrier, and is the single largest purchaser of seats on AC flights. While AC pays approximately
$250M to Aeroplan each year for Miles to reward fliers, Aeroplan pays out approximately $540M per year for travel rewards
on AC flights. Approximately 71% of all rewards claimed by Aeroplan members in 2014 were used for air travel. Thus, we see
renewal of the CPSA as a certainty although we do foresee that the negotiation will provide the opportunity for Air Canada to
the way it awards Aeroplan Miles to be based on the value of the tickets that members purchased rather than on the distance
flown.

Overview of Aeroplan Program

On January 1, 2002, Aeroplan, an incentive program created by Air Canada in 1984, was spun-out as a wholly-owned limited
partnership of Air Canada, Canada’s largest domestic and international full-service airline. Aeroplan went public in 2005.
Aeroplan now acts as Air Canada’s exclusive loyalty marketing provider in Canada and earns service fees for managing the
airline’s tier membership program in addition to booking, service and administrative fees from members who redeem their
Aeroplan Miles when flying Air Canada, Air Canada Express and Air Canada Rouge, or with Star Alliance members and small
regional airlines. In return, Air Canada earns a stable and recurring revenue stream. Aeroplan extends to retail as well,
consisting of many partners across Canada. In H1/15, over 45% of Gross Billings from its sale of Loyalty Units stemmed from
deals with the Company’s three financial/credit card partners (TD, CIBC, AMEX), while Sainsbury’s represented 21% and Air
Canada 14%. More importantly, in 2014, ~71% of all rewards claimed by Aeroplan members were for air travel.

On January 1, 2014, Aimia introduced several new initiatives meant to improve Aeroplan’s operations and increase
membership, even if breakage and short-term profitability weaken. First, the new Distinction program awards top
accumulating members with preferential mileage levels for redemption, bonus mile offers and exclusive privileges. Moreover,
Distinction members, who achieve different levels based on the number of miles earned, are 2.5x more likely to visit Aeroplan
stores and 85% hold Aeroplan-affiliated credit cards. Secondly, the new Market Fare Flight Rewards (“MFFR”) replaced
ClassicPlus Flight Rewards, allowing members to redeem awards with 20% fewer miles for any seat on any Air Canada flight
based on a market rate. As a result, as more seats become available because of fleet and route expansion, more points will be
accumulated, which should benefit Aimia. Finally, in order to improve engagement, Aeroplan canceled the seven-year mileage
redemption policy so that Miles no longer expire after seven years if a member has at least one accumulation or redemption
activity every 12 months. Thus, while this strategy may weaken the Company’s profitability, higher engagement should help
lower Breakage, which is a gauge of active participation by members.

Overall, these changes are amongst some of the initiatives that Aimia is taking in order to handle complaints that Aimia’s
points are difficult and expensive to redeem, that the number of available seats to choose from are limited (MFFRs extend to
100% of available seats).

Air Canada and Aeroplan Depend on Each Other

Air Canada, with its Star Alliance partners, is Aeroplan’s largest Redemption Partner. Conversely, Aeroplan is Air Canada’s
single largest customer. Aeroplan helps Air Canada be more competitive through attractive pricing, which helps increase the
airline’s market share in challenging leisure travel markets. Aeroplan’s partnership with Air Canada is further enhanced by its
ancillary relationship with car rental companies and hotels, which allow members to accumulate Aeroplan Miles and use them
towards airline ticket rewards.

In order to participate in the Aeroplan Program, Air Canada pays a fee which is based on Aeroplan Miles awarded to Air
Canada customers who travel on AC flights as part of Aimia’s Gross Billings. Aeroplan must annually purchase a minimum
number of reward travel seats on AC flights, or 85% of the average number of seats utilized in the three preceding calendar
years (currently ~$460.5M based on the previous three years). The CPSA prevents any other transportation business that
competes with Air Canada or Star Alliance members from participating in the Aeroplan Program. In 2014, Air Canada
purchased $248M Aeroplan Miles and the estimated minimum requirement in 2015 (based on an average from the past three
years) is $212M.

Success of Air Canada’s Turnaround

Over the past two years, CEO Calin Rovinescu has successfully turned around a once near-penny-stock airline faced with
significant labour issues, high expenses, unhealthy debt levels and poor pension plan funding. Its new budget segment, carrier
Air Canada Rouge, has provided improved core results and record load factors. Although the addition of more economy-class
seats through Rouge and the new high-density aircraft has brought about lower yields (the average fare paid per mile flown),
the cost per available seat mile is declining faster than yields, resulting in higher profitability. Air Canada is looking to expand
internationally through Rouge, whose cost per available seat mile is said to be 29% lower than Air Canada’s mainline fleet and
whose labour costs make up a much smaller percentage on long-range flights than domestic ones.

The interest for air travel from Aeroplan members has resulted in significant demand for Air Canada tickets. Air Canada
continues to be an important contributor to Gross Billings, even as Aeroplan’s expansion into new business segments (such as
the yet to be detailed partnership with Toyota) has reduced its contribution, highlighted by the gradual share decline in
Exhibit 1.

One of the benefits of using Aeroplan is that Air Canada can entice members towards routes that it wants to increase its load
factor on, by offering bonus Miles, but also by offering more reward seat availability on certain routes at certain times to
entice members to cash in Miles and further fill planes. We expect that the additional aircraft being added for the expansion
of Air Canada Rouge will result in Air Canada leveraging this tool.

Air Canada Enticing More Members to use Rouge – Showing the Value that it Places on Aeroplan
Initially, Air Canada significantly reduced the number of Aeroplan Miles that it provided members for booking through Tango
and on Rouge flights with its launch in 2012. By November 2013 (see Exhibit 2) Air Canada Rouge fliers started earning Miles
comparable to the mainline carrier. With Rouge, Air Canada was looking to increase its business to leisure destinations in
Europe and the Caribbean with lower prices, more seats per plane, and lower costs. Contributing to the lower costs was a
reduction in the number of Aeroplan Miles that members earned for flights because Miles earned were based on a fixed rate.
Air Canada now seems to have re-evaluated the importance of Aeroplan Miles in customer decision making and in rewarding
loyalty and has significantly increased rewards on Rouge flights to match rewards on the main carrier. This further
demonstrates the importance and value of Aeroplan Miles to Air Canada.

Our Forecast for a Change in Aeroplan Miles Reward Structure (from Air Canada only)

Air Canada and Aeroplan have modified earnings and redemption grids several times to optimize the program. We expect that
with the CPSA renewal in 2020, the partners will move more to a dollar-based earning model to more closely align Air
Canada’s marketing spend with revenue generation. We have seen other airlines following the same track, such as WestJet’s
reward program issuing WestJet dollars, and Delta’s use of both base SkyMiles on flights combined with Medallion Qualifying
Dollars to track member spending on Delta flights.
Title: Re: TSX:AIM - Aimia
Post by: kab60 on July 08, 2016, 10:46:55 AM
I think this Company looks very interesting - espescially since Tor Lønnum joined. Check out the returns at Danish Tryg since he joine. Also like his comment on the recent CC. Anyway, I need to understand the business better. Anyone have a primer on the industry? And some good public comps?
Title: Re: TSX:AIM - Aimia
Post by: Sunrider on July 08, 2016, 02:18:12 PM
Could someone kindly point me to the prospectuses for the series 1 - 3 prefs? Google and the aimia website's search function are letting me down.

Thank you
C
Title: Re: TSX:AIM - Aimia
Post by: nodnub on July 08, 2016, 03:52:24 PM
Could someone kindly point me to the prospectuses for the series 1 - 3 prefs? Google and the aimia website's search function are letting me down.

Thank you
C

try this: 
https://www.preferredstockchannel.com/symbol/aim.pra.ca/
Link to PDF Prospectus in middle of page.

Don't see the other series on that site.  But they should all be on SEDAR under issuer name of Groupe Aeroplan or AIMIA or something.

Title: Re: TSX:AIM - Aimia
Post by: Sunrider on July 09, 2016, 01:35:41 AM
Thank you - I had found that but the site now wants me to register. I've not been able to find the other ones.

SEDAR is just a disgrace.

C.
Could someone kindly point me to the prospectuses for the series 1 - 3 prefs? Google and the aimia website's search function are letting me down.

Thank you
C

try this: 
https://www.preferredstockchannel.com/symbol/aim.pra.ca/
Link to PDF Prospectus in middle of page.

Don't see the other series on that site.  But they should all be on SEDAR under issuer name of Groupe Aeroplan or AIMIA or something.
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on July 12, 2016, 06:30:05 AM
kab60-  the only pure-play comps I know of are Multiplus and Smiles in Brazil.  But ADS has a loyalty division in which they manage an air miles program called LoyaltyOne.  ADS is a big company so maybe there is some decent disclosure.

Title: Re: TSX:AIM - Aimia
Post by: petec on July 12, 2016, 08:35:30 AM
I used to know this quite well and I also know Multiplus and Smiles.   I tend to think it is a fairly good business especially when card penetration is growing.   However it is very dependent on the details of the contract with the airline, so my two questions would be:

1) why don't customers prefer cashback cards?

2) how do we get confidence that the Air Canada agreement will stay favourable (renegotiated in 2020 I believe).

The sweet spot for these companies is when individual flyers get points for business flights (i.e., that they didn't pay for) that can be redeemed in ways that boost the airline's load factor (i.e. the airline generates loyalty at no additional cost).
Title: Re: TSX:AIM - Aimia
Post by: fisch777 on July 12, 2016, 04:24:50 PM
As is often the case, when they built the elaborate new downtown HQ with renowned art in the lobby, time to sell.

Management is sub-par at best here.  No rhyme or reason when we talked to them.
Title: Re: TSX:AIM - Aimia
Post by: petec on July 13, 2016, 01:02:50 AM
Management is sub-par at best here.  No rhyme or reason when we talked to them.

Agreed.
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on July 13, 2016, 09:24:40 AM
As is often the case, when they built the elaborate new downtown HQ with renowned art in the lobby, time to sell.

Management is sub-par at best here.  No rhyme or reason when we talked to them.

I am not sure I agree.  They are operating in a very competitive industry with low barriers to entry.  And yet they have managed to pay 8% of sales out to shareholders as buybacks and a dividend that is increased annually, over the last 5 years.  They have shifted a platform from one wholly dependent on one airline to multiple platforms.  That said, more could be done to diversify away from Air Canada.  Its not a good place to be, if something bad happens with the relationship. 
Title: Re: TSX:AIM - Aimia
Post by: petec on July 14, 2016, 01:13:27 AM
As is often the case, when they built the elaborate new downtown HQ with renowned art in the lobby, time to sell.

Management is sub-par at best here.  No rhyme or reason when we talked to them.

I am not sure I agree.  They are operating in a very competitive industry with low barriers to entry.  And yet they have managed to pay 8% of sales out to shareholders as buybacks and a dividend that is increased annually, over the last 5 years.  They have shifted a platform from one wholly dependent on one airline to multiple platforms.  That said, more could be done to diversify away from Air Canada.  Its not a good place to be, if something bad happens with the relationship.

Can you elaborate on the competition?   I've never been quite able to make my mind up about this.   Part of me thinks that while there is a lot of competition in airlines and credit cards, once you have your relationships with those two, running a rewards business should be as easy as falling over a log.   Who do you view Aeroplan (mainly) as being in competition with?   
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on July 14, 2016, 06:14:35 AM
As is often the case, when they built the elaborate new downtown HQ with renowned art in the lobby, time to sell.

Management is sub-par at best here.  No rhyme or reason when we talked to them.

I am not sure I agree.  They are operating in a very competitive industry with low barriers to entry.  And yet they have managed to pay 8% of sales out to shareholders as buybacks and a dividend that is increased annually, over the last 5 years.  They have shifted a platform from one wholly dependent on one airline to multiple platforms.  That said, more could be done to diversify away from Air Canada.  Its not a good place to be, if something bad happens with the relationship.

Can you elaborate on the competition?   I've never been quite able to make my mind up about this.   Part of me thinks that while there is a lot of competition in airlines and credit cards, once you have your relationships with those two, running a rewards business should be as easy as falling over a log.   Who do you view Aeroplan (mainly) as being in competition with?

I think you sort of covered it: Airmiles, Credit card rewards programs.  The reason they are able to generate free cash flow is from the built in spread in the existing relationships.  It is similar to a utility such as enbridge.

The problem with utilities, and the aimia businesses, is that in order to expand they have to do so by acquisition.  Every other similar reward slot in the world is already taken by incumbents.  I wasn't very clear in terms of the low barriers to entry remark.  The barriers to entry WERE low when all these programs were started.  They are now very high and cannot be easily transferred across platforms.

Its a strange spot to be in.  On one hand it is quite profitable.  On the other hand you are beholden to a potentially fickle partner.  To grow at all you have to issue equity or debt in a significant enough amount to buy a large established platform elsewhere. 

I am not sure I would buy the common stock in this company - the upside is limited.  The prefs are nice though.  I own a 5-6% position in the a's .   They may always trade down, but in this yield starved world their reliability may get recognized.  All that being said, if the relationship with AC soured even the prefs would be worthless. 

However, I think that the worry about the contract renewal is all for naught.  In order to start its own rewards program or go with some other established program Air Can. would need  to compensate existing Aeroplan points members.  If AC didn't buyout aeroplan then they would alienate a big portion of their customers who would see it as a ripoff.  I dont know about you but I hate being ripped off, and really only tolerate it from my phone company (which I hold stock in).  So, the contract gets signed before 2020, the status quo persists and Rupert keeps his job managing a stranded asset, and attempting periodic acqusitions when opportunities arise. 

The final irony and a credit to Aimia management is that they hold the most consistently profitable piece of the Air Canada franchise. 

Title: Re: TSX:AIM - Aimia
Post by: petec on July 14, 2016, 08:31:52 AM
Uccmal,

I agree with you on barriers to entry.   I don't agree on the contract risk: the risk isn't that AC goes elsewhere, it's that the new contract has lower margins.   It's been interesting watching Multiplus and Smiles renegotiate with their parent airlines.   So far it's always been possible to find a win-win solution and hopefully that's possible here.   But, managing the spread at these businesses is actually pretty complex - they are a bit of a black box in that regard - and the contract details are key.

I need to do some digging on the prefs - haven't invested in prefs before so a lot to wrap my head around.

P

Edit - I realise that AC's inability to go elsewhere strengthens Aimia's hand; but since Aimia is just as dependent on AC, I still see risk that the balance of profitability could be tilted in AC's favour.
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on July 14, 2016, 10:38:09 AM
Uccmal,

I agree with you on barriers to entry.   I don't agree on the contract risk: the risk isn't that AC goes elsewhere, it's that the new contract has lower margins.   It's been interesting watching Multiplus and Smiles renegotiate with their parent airlines.   So far it's always been possible to find a win-win solution and hopefully that's possible here.   But, managing the spread at these businesses is actually pretty complex - they are a bit of a black box in that regard - and the contract details are key.

I need to do some digging on the prefs - haven't invested in prefs before so a lot to wrap my head around.

P

Edit - I realise that AC's inability to go elsewhere strengthens Aimia's hand; but since Aimia is just as dependent on AC, I still see risk that the balance of profitability could be tilted in AC's favour.

From ACs perspective it looks like a honey pot, no doubt.  I guess thats why Aimia is trading down, and may always trade at a discount.
Title: Re: TSX:AIM - Aimia
Post by: petec on July 15, 2016, 10:29:40 AM
Just digging into the prefs.   It strikes me that an advantage of convertibility to Series 2 (where the rate is set off the 3-month T-bill) is that you are fully inflation protected *and* protected against NIRP because the 3-month is highly unlikely to trade materially below zero.   Does that make sense?

Title: Re: TSX:AIM - Aimia
Post by: intothebreach on July 15, 2016, 10:42:58 AM
petec,

If you are digging into any Canadian pref shares, it is really worth checking the following thread where fellow board members sculpin, SafetyInNumbers and Carboard (among others) have made extremely useful contributions (thanks to all by the way!):

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/dumbdee-the-goodmans-the-bad-the-ugly-30-of-nav-bargain/msg269602/#msg269602
Title: Re: TSX:AIM - Aimia
Post by: petec on July 15, 2016, 10:58:25 AM
Thanks!
Title: Re: TSX:AIM - Aimia
Post by: bbarberayr on July 16, 2016, 05:51:22 PM
Uccmal,

I agree with you on barriers to entry.   I don't agree on the contract risk: the risk isn't that AC goes elsewhere, it's that the new contract has lower margins.   It's been interesting watching Multiplus and Smiles renegotiate with their parent airlines.   So far it's always been possible to find a win-win solution and hopefully that's possible here.   But, managing the spread at these businesses is actually pretty complex - they are a bit of a black box in that regard - and the contract details are key.

I need to do some digging on the prefs - haven't invested in prefs before so a lot to wrap my head around.

P

Edit - I realise that AC's inability to go elsewhere strengthens Aimia's hand; but since Aimia is just as dependent on AC, I still see risk that the balance of profitability could be tilted in AC's favour.

From ACs perspective it looks like a honey pot, no doubt.  I guess thats why Aimia is trading down, and may always trade at a discount.

They sure weren't at a discount when then were at $19!
Title: Re: TSX:AIM - Aimia
Post by: bbarberayr on July 16, 2016, 06:00:27 PM
I think Air Canada has realized that the Aimia business practices have hurt the Air Canada brand and are not willing to give a lot to support Aimia.  Just google "aeroplan crappy" and read some of the web sites.  Reality is Aimia management made a bunch of money by goosing profits a number of years ago by "burning" customer air miles by doing things like adding fees and fuel surcharges (and not removing when fuel came down), making it hard to book flights, sending out 1 email in the midst of many promotional ones warning about expiring miles, and then taking them away with no recourse, etc.  Worked for a few years when there were a lot of customers with many air miles, not so much any more.

Now when you buy an Air Canada ticket, the cheapest fares only get 25% of Aeroplan Miles, so you can see how Air Canada has de-emphasized miles already.

So Air Canada probably seeing a lot less value in Aeroplan (as do Aeroplan's customers), so Air Canada not willing to pay up.
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on July 17, 2016, 08:49:31 AM
I think what you're saying was true in the years leading up to 2013, but starting in January 2014 aimia revamped aeroplan to make it easier for members to get the flights they want.  You can see it in their margins, which compressed significantly that year (and last year as well).  Also, they did away with the 7-year expiration policy back in 2013

Aeroplan margins will likely compress again in 2020 when the current CPSA expires, simply because the current contract was crafted under extraordinary circumstances (air canada was in distress and wanted to IPO aeroplan to raise cash).  Obviously those circumstances no longer exist. 
Title: Re: TSX:AIM - Aimia
Post by: txfan2424 on July 19, 2016, 09:43:29 AM
- Competitive position is erroding. Part of the value of a shared currency loyalty program is having a number of large retailers / partners signed up. AIM has lost a few partners (grocery) which is a worrying sign. Why would partners leave if things were going well?
- Canada has more credit cards per capita than any other country in the world (I think) so this is an incredibly competitive business. Large scale retailers should be trying to monetize their brand / size as much as possible. I think pricing pressure continues. AIM margins are already less than half vs five years ago. If it halves again, they might have trouble covering their fixed obligations (interest + pref div). I think they'll have to sell assets to repay debt
- Only competitive advantage is Air Canada contract and with large program participants leaving, it isn't clear that Air Canada can't leave also. So, we have a binary event coming in the next few years

This is a pass for me. A few ways the prefs work (asset sales, buyout, etc.) but all are dice rolls.



Title: Re: TSX:AIM - Aimia
Post by: petec on July 19, 2016, 09:58:57 AM
I've still got a lot of work to do on this one but my initial take isn't so negative.

- Coalitions don't work for every partner.   Seeing some leave is an issue, but not necessarily a fatal one.   The benefits are very different to each partner, for a start.
- If Canada has more cards per capita, credit cards are very competitive.   But Aimia doesn't issue cards.   It provides the issuer with a competitive edge: free flights on Air Canada.
- Air Canada needs a loyalty programme.   Setting up an entirely new one is a major project.   They have an incentive to stay.   The question is, on what terms?

I reserve the right to change my mind as I read more ;)

Pete
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on October 01, 2016, 10:26:49 AM
Any U.S. citizens here?  I just got my preferred dividends and it looks like I got hit with a 25% withholding tax ... don't the U.S. & Canada have a tax treaty that reduces the rate to 15%?

thanks
Title: Re: TSX:AIM - Aimia
Post by: scorpioncapital on October 01, 2016, 11:26:53 AM
Might be useful - http://topforeignstocks.com/2015/10/17/an-update-on-canadian-reduced-tax-withholding-rate-for-us-investors/

Title: Re: TSX:AIM - Aimia
Post by: Uccmal on November 10, 2016, 04:33:14 AM
Is anyone still following this? 

They just released earnings this week, and announced an early buy in of their Series 3 prefs. 

I hold a middling position in the .series 1 prefs (Aim.pr.a) which is up about 20% from my buy in. 

I am looking at a small position in the common but need some outside input while I try to figure out the financial position. 
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on November 10, 2016, 06:08:47 AM
I still hold the "B"s and much less "C"s.

You should actually switch the "A"s for "B"s: slightly higher yield right now + since they are exchangeable for each other in 2020 on a 1 for 1 basis, you get some additional capital appreciation built in. You also participate immediately on any interest rate increase with the floaters.

By the way, it is not preferreds that they are redeeming but, a note (debt) that is due in 2017. It is still a Serie 3 note which may be confusing.

Regarding the stock, I would not touch it. Not when you can get into the "B"s still at these prices. You only get 1% more yield with the stock and similar capital appreciation upside. If things go sour, they will stop buybacks, then cut the dividend on the stock. The expenditure for stock dividends is much larger than for all preferreds combined. So there is quite a bit of protection with the preferreds IMO against business deterioration or like a worst than expected contract renewal with Air Canada due in 2020.

If confidence returns to this name, I would expect a big move up in the prefs. The stock will likely move as well but, fixed income instruments tend to react very quickly to any stabilization in a business. At that point, it will be time to look at the stock and see if the upside justifies an investment.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on November 10, 2016, 06:33:25 AM
Thanks Cardboard,  I just did a quick cursory review of the balance sheet, and income.  Wish I had a memory like Buffett, then I wouldn't need to look at these two three times or more. 

I agree with you on the common stock.  I dont like the way they present the earnings.  There is too much non-GAAP metrics in there for my tastes.  Thanks for the clarfication on the bonds versus the preferreds.  And thanks for the tips on the preferred variances. 

I will have a serious look at switching if I can get any. 

Confidence would return alot faster if they stop raising the dividend and showed they can collect the cash, rather than issuing more debt.  Just my opinion. 

Title: Re: TSX:AIM - Aimia
Post by: petec on November 10, 2016, 07:14:05 AM
I also own prefs.   My view after doing quite a bit of work is that there is an extremely high likelihood that the prefs are money good unless (and possibly even if) the Air Canada renegotiation is a complete catastrophe which I do not expect.   However, I haven't been able to get enough info to get comfortable with the common, so I totally agree with you both.

The prefs strike me as an incredible security:
- 9% yield, roughly.
- double upside to rising rates, given that the dividend is computed as a % of par and you're paying half that.
- very limited downside even in a seriously bad scenario for the company.
- moving up the capital structure as they pay down debt.

The major risk is that inflation rises and rates don't, but even then, you're still getting your 9%, which is ahead of what stock markets produce in the very long run.

My other risk as a UK investor is currency, but I tend to think that comes out in the wash over time, and I intend to hold these for a very long time.

P
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on November 10, 2016, 07:35:04 AM
by the way, there's a writeup pitching a long position in these preferreds on valueinvestorsclub.com   it was posted on oct 6th, so even if you're not a member you'll still be able to read it soon (if you sign up with your email you can read ideas on a 45 day delay).

plus, the author sounds like an absolute genius  ;)
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on November 10, 2016, 07:43:21 AM
I also own prefs.   My view after doing quite a bit of work is that there is an extremely high likelihood that the prefs are money good unless (and possibly even if) the Air Canada renegotiation is a complete catastrophe which I do not expect.   However, I haven't been able to get enough info to get comfortable with the common, so I totally agree with you both.

The prefs strike me as an incredible security:
- 9% yield, roughly.
- double upside to rising rates, given that the dividend is computed as a % of par and you're paying half that.
- very limited downside even in a seriously bad scenario for the company.
- moving up the capital structure as they pay down debt.

The major risk is that inflation rises and rates don't, but even then, you're still getting your 9%, which is ahead of what stock markets produce in the very long run.

My other risk as a UK investor is currency, but I tend to think that comes out in the wash over time, and I intend to hold these for a very long time.

P

Your in the UK.  I have wrestled for years over currency implications between Canada and the US.  I came to the conclusion that over time it is a wash.  I do however move currency between my US and Canadian accounts, more in response to where the values are rather than trying to trade the actual currency.  Three years ago I held almost no Canadian stocks, now I hold almost no US stocks.  Coincidentally, when Cdn. stocks go on sale the dollar is also way down.  Anyway this is off piste - sorry. 
Title: Re: TSX:AIM - Aimia
Post by: sculpin on November 22, 2016, 07:29:49 AM
Good write-up on AIM prefs by MPK391 at VIC. Aval now to those who have partial mbrship (anyone can access this) as the below copy & paste does not include the charts....


AIMIA INC AIM.PR.B

October 06, 2016 by mpk391
2016   2017
Price:      11.14      EPS      0   0
Shares Out. (in M):      3      P/E      0   0
Market Cap (in M):      165      P/FCF      0   0
Net Debt (in M):      0      EBIT      0   0
TEV:      0      TEV/EBIT      0   0
Submit an idea for full membership consideration and get access to the latest member ideas.
 
Description / Catalyst
Messages (2)
Description

Worst case scenario, this is a ~10% yield that should be covered nearly 4X over.  There’s a double discount here: Canadian preferred shares have been dumped en masse, and investors are overly concerned about the renewal of Aimia’s contract with Air Canada in mid-2020.   So you get paid handsomely to wait for these shares to once again trade near par - roughly a double from here.  There’s a good chance the contract gets renewed early -  perhaps in the next year or so – which would be a great catalyst.
 

(all amounts in C$ unless noted)
 


 

A word on liquidity: the series 1-3 preferred shares together have $165M in market value and trade about $150K per day.  I own the Series 2 exclusively, since it has the widest discount to par and it pays a floating interest rate (and since I had to enter a share price, shares out, and symbol, I entered the Series 2 data.  But they’re all cheap.  If I were more constrained by liquidity, I’d be happy owning all three.
 
 

Rate reset preferreds such as Aimia’s Series 1 & 3 began appearing in 2008, when interest rates were falling and everyone thought they’d rebound sooner rather than later.  Sold largely to yield-seeking retail investors, they now account for ~60% of the almost $67B Canadian preferred share market.  Floating rate preferreds – such as Aimia’s Series 2 – aren’t as common, but obviously offered another way to play this seemingly-inevitable rebound.  And of course, rates went on to sink even lower, especially around early 2015 when the retail investors started throwing in the towel.   This probably explains the initial swan-dive in the Series 1-3.
 
But it’s company-specific fear that probably explains why there’s been hardly any rebound.  The market is worried about what happens to Aimia when its contract with Air Canada (AC) expires in mid-2020.  Aimia grew out of Aeroplan – originally AC’s frequent flyer program – which was spun off from AC in 2005.  Today, Aeroplan is a full-blown loyalty “coalition” – in which lots of consumer-focused companies buy points (fka “miles”) to reward their customers.  Last year, just over 20% of points were purchased by AC to reward their frequent fliers.  70% were purchased by credit card issuers (CIBC, TD Bank, and Amex), and other ~10% by a hodgepodge of supermarkets, gas stations, etc.  But AC still remains hugely important to Aeroplan, since when these customers redeem their points, they spend 80% of them on airfare.  AC, along with its low-cost carrier Rouge, provides perhaps 86% of that 80%, while the other Star Alliance airlines provide the rest.
 
It might seem strange that anyone is freaking out about a contract that doesn’t run out for another 3.7 years, particularly when there’s never been any friction (in public, anyway) between the two sides.  And it is strange.  But it’s not totally crazy.  The CEO of AC has been flagging the upcoming renegotiation as a source of future cost savings[1].  The original contract was signed under some fairly unusual circumstances.   BMO’s analyst – perhaps the most bearish guy on Aimia – has gone so far as to say that “there is longer-term existential uncertainty around the Air Canada contract expiry in 2020.”
 
If you really think the contract won’t be renewed, this idea just isn’t for you.  Aimia might survive such an event,[2] but it’s hard to say how the cash flows would change.  At best you’d be in for a white-knuckle ride.
 
But it’s extremely unlikely that AC and Aeroplan part ways.  Yes, the new terms won’t be as good (but they’ll be good enough).  To understand why, one needs to know some history.  The current contract was probably not the product of an arms-length negotiation.  I doubt there was a negotiation at all.   Instead, this was the result of why I’d call “valuation-multiple arbitrage.”  Cerberus – which came to control ACE Aviation Holdings[3] through its 2003 bankruptcy - was looking for ways to pay down some debt at ACE and maximize the value of ACE equity.  To do so, they carved out some of AC’s higher quality income streams, including its frequent flyer program[4].  Thus, AC agreed to set aside 8% of its capacity for sale to Aeroplan at cost[5].  These flights were dubbed “ClassicFares” and in the early years they represented nearly all the flight rewards that Aeroplan offered.
 

It’s all about ClassicFares…
 
In addition to Aeroplan, Aimia today has lots of other loyalty-marketing operations around the globe.   But these cats & dogs basically just about offset corporate overhead, and thus Aeroplan remains the key to the fate of these preferreds.
 
So we need to estimate much a renewal could ding Aeroplan’s roughly $200M of annual free cash flow.   Let’s try to get a sense for how much room there is to renegotiate..  Looking at AC’s financials, it seems likely that variable costs are at least 75% of revenues.  See for yourself:
 
https://1drv.ms/x/s!Aqrw-OOY6WUhgP5PphXArKZqyAApwA
 
The exact amount looks a bit more like 80% to me, but to avoid quibbling and to be conservative let’s use 75% instead.
 
So if Aeroplan buys ClassicFares at cost, and cost is at least 75% of market prices, then we know that Aeroplan’s cost for ClassicFares is probably not more than 25% under-market[6][7].  Since the worst that AC would demand under a new contract is full market prices, the maximum increase over current prices would be 33% (=100%/75%-1).
 
We can also estimate how much Aeroplan is currently paying.  Consolidated “cost of rewards and direct costs” were 1,601.9 in 2015.  Star Alliance airlines were 43% of this number, and Aeroplan is the only Aimia coalition affiliated with Star Alliance. 
 
So, 1,601.9 * 43.0% = 688.8 total spent by Aeroplan on flight rewards (all from Star Alliance)
 
688.8 * ~86% = 592.7 spent on Air Canada/Rouge vs other Star Alliance airlines
592.7 - $180 cost of MarketFare revenue (more on this in a moment) = 412.7 spent on ClassicFares
 
33% max increase * 412.7 = $137.6M worst-case hit to Aimia’s FCF (approximately)
 
Which means…
 
200 of current annual FCF[8] – 137.6 = 62.4 FCF still available to pay preferred dividends
 
62.4 / 16.9 of preferred dividends = 3.7x worst-case coverage
 
But this is very much a hypothetical exercise.  There’s no way Aimia is going to pay even close to full retail prices for these seats.  Aeroplan’s MarketFare program proves that it can negotiate a discount to market rates for bringing AC a large volume of business.  Adding the ClassicFare flights to the mix, that volume of negotiated-rate business will more than triple.
 
Since the supply of ClassicFares is limited, Aeroplan has long offered flight rewards to members who can’t get a ClassicFare on the flight they want.  The first iteration of this was the Avenue program, followed by ClassicPlus in 2006, and finally by MarketFare in 2014.  These were a small part of the mix at first, but they’re ~30% of Aeroplan flight rewards today and total ~$180M in annual revenue to AC.  While the prices on these are closer to market rates, they’re still at a significant discount, particularly for members who earn lots of points on a regular basis.
 
Finally, keep in mind that AC doesn’t hold all the cards.  One big reason is that the revenue that AC gets from MarketFare flights comes with attractive margins.  MarketFare rates were negotiated just a few years ago, when neither party was in any sort of weak bargaining position, thus AC is likely still happy with these prices.  It would be hard for AC to replace all of this lost revenue – creating a new coalition requires signing a major credit card issuer, and it’s not clear who that would be.  Canada’s top 4 issuers (RBC, CIBC, TD, BMO) have something like 72% of Canada’s general purpose credit card purchase volume (5th place has ~6%), and they’re all pretty tied up as far in terms of loyalty coalitions.
 
Another big reason is that Aeroplan has developed close relationships with essentially all of AC’s best customers in the process of managing AC’s frequent flyer program.  If AC were to take its program back in-house, one can imagine all sort of ways these customers could get upset and take their business to WestJet, Porter, American, et al.
 
By the way, Aeroplan’s earnings come from more than just the gross profit on ClassicFares:  In 2015, It might[9] make some money on MarketFares too, albeit a smaller margin.  It definitely makes money on non-airfare rewards, which now attract ~20% of all points spent, and carry gross margins much higher than the margins on airfare overall.  It probably makes some money on various travel-related fees (e.g. flight change fees), as well as a tiny profit for managing AC’s frequent flyer program.  Last and certainly not least, Aeroplan makes money on the points that members never use, which in theory would be 100% gross margin revenue.
 

Catalyst – early renewal
 
Aeroplan has a 6/28/2019 deadline by which it must notify AC if it intends to not renew the CPSA on 6/28/2020.  But Aimia has a debt maturity on 5/17/2019, and AC has a veritable “wall” of debt maturing in 2019, so one would expect the renewal discussion to get underway in 2018.  From there, it’s not a stretch to think that Aimia might be able to push for a deal in advance of its 1/22/2018 debt maturity[10], which would allow it to refi at a decent rate and free up cash for its hefty dividends and buybacks.  (Aimia’s capital allocation certainly doesn’t suggest any nervousness about Air Canada.)
 


 

Starting negotiations early won’t put Aimia in a bad negotiating position, for the simple reason that generates nearly enough free cash flow to pay down all three pieces of debt as they come due.  In fact, Aimia is prepared to do just that for the upcoming January 2017 maturity.  The CFO will give an update on this issue during the 3Q16 call in November.  In addition, there’s also:
 
excess cash of $130M[11]
a $300m revolver which is nearly untapped
Cardlytics biz is on the block - worth maybe $70m.  A sale should be neutral or better to FCF.
48.9% stake in PLM – a Mexican loyalty coalition built around the frequent flyer program of AeroMexico.  This business is a gem – grows quickly while throwing of lots of FCF.  PLM has been rumored to be worth US$1B[12], which would put Aimia’s stake at C$650M (note that a sale would reduce FCF by ~$15M - the dividends Aimia receives from PLM).  It’s highly likely that PLM will be IPO’d eventually.
 
But what if Air Canada goes bankrupt again?
 
AC has been doing well for a while now.  Last I checked, adjusted[13] net debt to EBITDAR was below 2.5X.  Interest expense + aircraft rental was ~1/3 of EBITDAR.  But of course, there could still be trouble if demand drops severely enough.  The question is, what then would happen to the current contract?
 
Thankfully, we can look to history as a guide.  In 2009 AC went through an out-of-court restructuring and the contract remained intact.  If AC were to actually file, the contract would probably still survive.  Management addressed the reasons why at their Analyst Day on 10/1/13 and I’ve pasted their words below.  But if you’re short on time, it boils down to:
 
Canadian bankruptcy law forces debtors to abrogate contracts completely or not at all (unlike Chapter 11 in the U.S., where they can tinker with individual terms).
This contract brings in a critical amount of FCF for AC which it couldn’t fully replace, or at least not quickly.  Therefore, it’s unlikely that any judge would allow them to abrogate the contract.
Since AC is the national flag carrier, the government would probably come to the rescue, as they did in 2009.
 

CEO Rupert Duchesne  – “Luckily or unluckily in 2009, we had a chance to put it to the test when Air Canada did get close to filing for bankruptcy. We did an out-of-court refinancing of the airline. We participated. We lent them $150 million at 12.75% coupon, which was I think fair with the risk, if anything. But I think that's very illustrative of the -- at the point that it really gets serious, we are a critical source of cash flow for the airline and being able to make up in a very short period of time for the loss of that would be almost impossible. And therefore, there wasn't the even any discussion at that time of what we going to do and see if we can find somebody else to do this for you. ... Also in a bankruptcy filing there's a whole lot of sort of legal and accounting issues that make it extremely hard for them sort of day off to do without, and we don't book.
 
The advice we received is that we don't think any bankruptcy judge in Canada would allow the airline to abrogate the contracts in such a way that gave cash flow risk to the airline. Frankly, if it did happen, our view is that we've actually got a fairly strong argument for the airline not to do anything. Because if we were to take that customer base and that revenue flow and provide it immediately to their competitors, WestJet, OneWorld Alliance, et cetera, et cetera, it will be a crippling blow to them. So I think what you'll see happen is have a fairly logical argument with them about is the price we're paying for Classic seats compensating you fairly for the opportunity cost of those seats? And we've done that work fairly regularly and the answer to that is yes. Are we paying you a fair price for the MarketFare rewards? And we've just done that deal so you could argue that in a moderate time, like we're in today, the answer to that obviously is yes at this point. And therefore, is there any incentive for anybody really to do anything? I think the answer is no. There are much more important things to worry about in the restructuring than a contract that is net cash flow positive to you in a much higher degree than if you did it yourself, which is what this is.
 
So we were lucky to be able to prove that in 2009, and our position now having done – just done this new deal with the card partners is much stronger than it was even in 2009 because the total revenue pile coming from these because of the breakage reduction we're talking about a moment ago and the increased price being paid by the bank means that the net cash flow in favor of the airline is even higher than it was in 2009 and will continue to grow as we get closer to the renewal of that relationship and the increased price being paid by the bank means that the net cash flow in favor of the airline is even higher than it was in 2009 and will continue to grow as we get closer to the renewal of that relationship.”
 
Former CFO David Adams – “Yes, just 2 other data points to that: one is Air Canada is a little bit different than many other airlines because it is a national flag carrier. And when it was put to the test in 2009, the Canadian government through EDC came to -- participated in the out-of-court refinancing and bridge loan. So the international gates are viewed as a national asset. And so notwithstanding WestJet's growth in the Canadian marketplace, I still believe that when push comes to shove, the Canadian government will be there with the financial support. So in a disaster scenario, we shouldn't be thinking about would the airline evaporate because there's a very, very low probability to that outcome. And for those of you, because we're here in London, just a finer point of Canadian bankruptcy law, we're not Chapter 11, right? So don't think of us that we are U.S. Chapter 11. And the difference is, is that in the U.S. you can actually cherry-pick contracts, I mean you get a judge to abrogate certain terms or conditions. In Canada, you have to abrogate the agreement in total. So it's either you keep the agreement out or you have to abrogate it completely. So when you talk about the risk of renegotiation, risk of cash flows, it's much higher in that circumstance than it would be under Chapter 11.”
 

 
By the way, Aimia’s equity was previously written up on VIC by castor13 in 2011 (under the old name of “Groupe Aeroplan”) as well as by Ragnar0307 in 2013.  I’m not sure if the equity is cheap today, but in any case, I think the preferred shares offer at least as much upside with less risk.
 
Also, note that Aimia is one of those rare small-caps where IR (Karen Keyes) can answer most if not all of your questions.  Not that you shouldn’t talk to the CEO/CFO, but you might want to try her first.
 
 

 
 

[1] AC CEO Calin Rovinescu at a conference on 12/2/15 - “10 years ago, Air Canada spun out its loyalty program to create shareholder value at that point in time. With that came a fairly expensive commercial contract.  And we will be restructuring that contract in 2020 with Aeroplan, and that will create value at that point in time.”  At AC’s 2Q16 call on 6/29/16 - “there's no question the expectation will be that, anything that is a below market, the term will be brought to market [upon renewal of the CPSA]”
[2] CEO Rupert Duchesne on the 6/27/13 analyst call – “So in the worst-case outcome where we wouldn't reach agreement with Air Canada in 2020, which is I said, I think it's extremely unlikely, we would have a hugely successful and economically viable program even without them. And frankly, it would be a program that would have been -- would be a great interest to other participants in the travel business.”
[3] ACE was the holdco which owned AC at the time.
[4] There is some evidence that AC had thought about eventually spinning-off Aeroplan prior to the 2003 bankruptcy, but in any event, I think it’s obvious that AC never would have agreed to these terms in an arms-length deal.
[5] CEO Rupert Duchesne at Analyst Day on 10/1/13 - “when we did the spinoff, we very carefully analyzed the real cost of the airline of providing those 8% of seats and we pay that pretty precisely. "
[6] Technically, there’s some circularity here, as ClassicFares are a component of AC’s revenue.  But we can overlook this since they’re probably not much over 3% of the total, and since our final estimate of the worst case scenario suggests a big margins of safety.
[7] For what it’s worth, Aeroplan’s own margins on ClassicFare seats seem to be close to 20%.  Since 2004, the program has offered seats at prices closer to market levels for those times when ClassicFare flights aren’t available.  In recent years, these have grown to ~30% of flights, but in the early years of 2002-2007 these were likely just a small portion of total flights, meaning that the Aeroplan’s gross margin on ClassicFare flights was probably close to its overall gross margin on airfare.  The latter margin never went much higher than 20%.  But it’s possible that Aeroplan was passing some of its savings on to coalition partners (e.g. CIBC) during that time, so this number might understate the true gap between ClassicFare and market prices.
[8] After interest expense but before preferred and common dividends
[9] This depends on the price that coalition partners pay for points, which could be less than the market value of the airfare it can buy
[10] CEO Rupert Duchesne at CIBC conference on 9/21/16 – “we would hope that we would get an Air Canada deal done long before we get to the end maturity on any of this debt.”
[11] CEO Rupert Duchesne at CIBC conference on 9/21/16
[12] http://www.bloomberg.com/news/articles/2015-07-30/aeromexico-said-to-value-loyalty-program-at-1-billion-for-ipo
[13] Adjusted for aircraft leases
 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst

Good chance they renew the contract with Air Canada in 2017.
Title: Re: TSX:AIM - Aimia
Post by: brendanb22 on November 23, 2016, 02:57:04 PM
Anyone have the series B preferred prospectus?
Title: Re: TSX:AIM - Aimia
Post by: SafetyinNumbers on November 23, 2016, 11:19:17 PM
It's the same as for AIM.PR.A.

Just search on Sedar on Jan 13, 2010 for prospectus.
Title: Re: TSX:AIM - Aimia
Post by: petec on January 26, 2017, 06:58:15 AM
Anyone have any idea why the prefs have moved so much recently?   Is the whole Canadian rate reset market moving, does anyone know (I'm not aware of an index)?   Or is it something specific that I have missed?   
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on January 26, 2017, 10:58:58 AM
i think this is probably just a case of "good things happen to cheap stocks" (or preferred shares, as it were).  The preferreds were all cheap vs the common and have rallied by a similar amount in the past month or two, while the common hasn't moved much.

there are about 3 different ETFs of canadian preferred shares.  the most relevant for Aimia, IMO, is CPD.TO, which has moved up a bit but not by all that much

also, I don't think this is due to changes in expected interest rates, as the Series C is fixed rate, and has moved up in similar fashion to the Series B, which is a floater.

as a general observation about investing, I'd say that at least half of my long ideas that work out well have had their big upward moves at times that don't correspond to any identifiable event.  and at least half of the potential catalysts that I see when starting a position never pan out.  like Warren & Charlie say, "we've always felt that it's easier to know what's going to happen than when it's going to happen."
Title: Re: TSX:AIM - Aimia
Post by: gokou3 on January 26, 2017, 11:33:18 AM
I hold preferred shares of AIM, BCE, BAM, BPO, & TA (last one just sold recently).  I hold the series which benefit from interest rate increases, such as 5-yr rate resets and floaters.  They all went up considerably over the past couple months.  I do think it's related to the yield increase of the 5-yr Canada bonds.

https://ca.investing.com/rates-bonds/canada-5-year-bond-yield
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on January 26, 2017, 01:57:40 PM
I agree with Misterkrusty.

The AIM preferreds have been ignored for way too long and were the last ones still yielding over 9%. At some point, some upward correction had to happen to put them more in line with other preferreds seen as "risky" such as CF, DC.A and a few others.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: SafetyinNumbers on January 26, 2017, 08:38:32 PM
The gap between the AIM.PR.A and AIM.PR.B is still pretty big while some other spreads between the fixed reset and the floaters have tightened. I just see it as a place to pick up some extra total return.
Title: Re: TSX:AIM - Aimia
Post by: Saj on February 16, 2017, 04:44:30 PM
How do you guys keep track of what looks interesting in the Canadian pref world? I put a page here to start tracking them by current yield in real-time: http://www.conferencecalltranscripts.org/prefs/

AIM still at the top as of this post.

But it's a pretty crude way to do it, especially with the reset ones. The current yield is of little use if a reset is coming up soon, so don't just blindly use the list, dig deeper into the security.

Is there a better way out there to track these that someone's already doing? I couldn't find anything better than quarterly updates so that's why I put this up.
Title: Re: TSX:AIM - Aimia
Post by: sculpin on February 17, 2017, 09:26:37 AM
Pretty crazy that the yields on the AIM prefs are still > 7% with the amount of cash flow, and improvements in the business being seen. Glad to see the clean up of the corporate structure and sell off of the non core assets.


Neil Linsdell, CFA | nlinsdell@iagto.ca | 1.514.499.0158
Associate: Dimitri Troulis | dtroulis@iagto.ca | 1.514.284.4180
Q4/16 Better than Expected, with More Improvements in 2017

Aimia reported Q4 results last night after the close. A conference call will be
held this morning at 8:30am EST (dial-in: 1-888-231-8191 or webcast).

Highlights

 Q4 gross billings were down less than expected, at -5.9% YoY (or -0.6% in
constant currency) to $647.5M, from $688.2M last year. Results were
above our forecast of $643.3M and consensus of $640.8M (range: $610.5-
652.2M). Excluding currency impacts ($36.3M of the $40.7M decline in
gross billings), primarily from weakness in the GBP, gross billings were
broadly stable.

 Americas Coalitions gross billings increased 0.8% to $347.7M (54% of gross
billings). Aeroplan loyalty unit gross billings were up 2% with higher
purchase volumes and active financial card base, in addition to higher gross
billings from Air Canada (AC-T, Not Rated) due to increased capacity.
 International Coalitions gross billings increased 1.9% (in constant
currency) to $189.5M (19% of gross billings). Nectar loyalty unit gross
billings were up 4% (in constant currency) benefitting from Sainsbury
Christmas bonusing campaigns. Also, Mail Newspapers will launch as a
major new Nectar partner during Q2.

 Adj. EBITDA of $64.7M (10.0% of gross billings) was up from $63.2M (9.2%
margin) last year and above our forecast of $59.2M (9.2% margin) and
consensus of $57.3M (8.9% margin), primarily due to Americas Coalitions
performance (higher gross billings and progress on operating expenses).

 2017 guidance – flat topline, but improving margins: Gross billings (core
business) were $2.1B (roughly flat from $2.142B in 2016). Adj. EBITDA
margin (core business) was ~12% (up from 11.2% on comparable segments
in 2016). FCF before dividends paid is for $220M+ (up from $206M in
2016).

 Concern over the Air Canada renewal is a non-issue in our opinion. There
is far too much value for both parties for the program to not be renewed.
In 2016, Air Canada paid ~$250M to Aimia but received more than double
that amount back through reward redemptions.

First Impression: Positive

Q4 results were better than expected, with growth in the Canadian Aeroplan
business, and margins showing signs of improvement from cost reduction
initiatives. The Company delivered on its 2016 guidance and provided 2017
guidance that highlights stability across its main coalitions and a simpler, more
focused business generating better profit margins and increased free cash flow.
While the environment remains challenging and currency headwinds persist,
the Company’s efforts to simplify the business lines and control costs should
result in a more efficient and profitable operation. Beyond this, we remain
convinced that Aeroplan and Air Canada will renew their partnership beyond
2020, providing significant relief to investors.
Title: Re: TSX:AIM - Aimia
Post by: samaniv on April 06, 2017, 02:37:00 PM

Are you still holding the AIMIA preferreds? If so, which series?

I hold a fair amount of the AIM.B.

I'm fairly new to preferred share investing and am curious as to whether, after the contract negotiation with Air Canada, we would expect these to trade near par again?

It seems there are still some other Canadian preferreds trading at a discount to PAR. I am happy to wait and collect the  7.5% dividend while I wait (which as you noted, has great interest coverage).

However, we are really waiting for the market to agree with us in terms of the creditworthiness of AIMIA. Once they do, then we would expect it to trade near PAR again. I think the contract renegotiation would lift some uncertainty and hopefully push to be a catalyst, but not guaranteed.

 
Title: Re: TSX:AIM - Aimia
Post by: Vanshon on April 06, 2017, 03:53:24 PM
I hold some B's and C's. I had some As but traded them for Bs when the spread between them became more than $1.30.  I think with a decent contract renewal you'll see some jump due to the removed uncertainty but they won't move back to par.
Since they are rate reset preferreds a major component of where they trade is based on the Canadian interest rate. Since the rate was higher when they were issued  part of the move down has been in tandem with the lowering of interest rates. Interest rate increases or an expectation of them would help to move them higher.  Given the real estate situation in Canada right now it's hard to see a significant move up in interest rates in the near future but I'd be happy to be wrong about that.
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on May 11, 2017, 06:04:39 AM
https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aAC-2469995&symbol=AC&region=C

Really bad news. It is time for an activist to take-out these clowns: eliminate the dividend, buybacks, cut management salaries, liquidate non-core, etc.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: clutch on May 11, 2017, 06:40:22 AM
I sold my preferreds at a significant loss...
Title: Re: TSX:AIM - Aimia
Post by: Yours Truly on May 11, 2017, 06:46:42 AM
Timber !
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on May 11, 2017, 07:10:54 AM
Although not trying to minimize the impact, really sucks, it is hard for me to believe that the company is not worth $773 million or the total value of the debt and preferreds at par. This does not take into account any spare cash or around $120 million.

Just Club Premier in Mexico for which they own 48.9% has 5 million customers already and growing or the same as Aeroplan and is more profitable. Contracts with TD and CIBC will continue to exist until 2024.

This will be sold, restructured or Air Canada may even revise their strategy as this may be a huge negotiating tactic. Starting their own program is an expensive venture and I am thinking that Aeroplan members will voice a lot of concerns with Air Canada.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on May 11, 2017, 07:27:22 AM
I am not doing anything with my prefs. The payouts will keep coming until the company goes bust.  My concern is that people will stop collecting rewards if there is no exclusive with AC.

As to the frequent flier points.  AC is in a really bad optics spot.  Screwing your frequent fliers like this will make any future programs they try to start a nonstarter at best. 

As you said Cardboard there are all sorts of options.

In light of this news I cant believe the CEO and Board didn't cut the dividend.  And whats with a buy back.  They should immediately be in cash conservation mode. 

Not a huge position but still hurts. 
Title: Re: TSX:AIM - Aimia
Post by: doc75 on May 11, 2017, 07:37:37 AM
Although not trying to minimize the impact, really sucks, it is hard for me to believe that the company is not worth $773 million or the total value of the debt and preferreds at par. This does not take into account any spare cash or around $120 million.

Just Club Premier in Mexico for which they own 48.9% has 5 million customers already and growing or the same as Aeroplan and is more profitable. Contracts with TD and CIBC will continue to exist until 2024.

This will be sold, restructured or Air Canada may even revise their strategy as this may be a huge negotiating tactic. Starting their own program is an expensive venture and I am thinking that Aeroplan members will voice a lot of concerns with Air Canada.

Cardboard

I agree that the selloff in the prefs might be overdone, but....

- I think there's very little chance this is a negotiating tactic.   AC is looking at this as a growth opportunity, and can certainly implement something better than Aeroplan.  Expensive for sure, but there's a lot of money to be made here. 

- My concern is that the loss of the AC partnership makes renewal of TD and CIBC contracts much less likely, or at least makes the contracts much less valuable.   Maybe I'm wrong, but I think people are drawn to Aeroplan almost entirely because of flight benefits.  That's why people want to go and get a TD/CIBC Aeroplan credit card. Surely AC will be looking to partner with the big banks to offer a credit card of their own, just as Westjet has done.

- I hold some prefs because I assumed the AC contract would remain in place. But I must admit I don't follow the company very closely.  Have there been any hints regarding the outcome of the Nectar renewal?
Title: Re: TSX:AIM - Aimia
Post by: doc75 on May 11, 2017, 07:49:51 AM
I am not doing anything with my prefs. The payouts will keep coming until the company goes bust.  My concern is that people will stop collecting rewards if there is no exclusive with AC.

As to the frequent flier points.  AC is in a really bad optics spot.  Screwing your frequent fliers like this will make any future programs they try to start a nonstarter at best. 

As you said Cardboard there are all sorts of options.

In light of this news I cant believe the CEO and Board didn't cut the dividend.  And whats with a buy back.  They should immediately be in cash conservation mode. 

Not a huge position but still hurts.

Either cash conservation or buying back prefs at the huge discount on offer.  What are they thinking with a buyback of the common???

As for AC bad optics:  I was thinking about this, too. People have 3 years of "business as usual" to use their points, and it's unclear how bad it will be to use those points for flights post-2020.  The best optics would be for AC to come to some agreement with Aimia regarding migration of Aeroplan points onto their new program (ie. AC buys the points from Aimia).  It will be interesting to see if there's a lot of consumer backlash, and if the media  makes this a big story.  Air Miles sure got a lot of bad press and had to make some changes as a result.
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on May 11, 2017, 08:04:09 AM
This company should see $600 million in free cash flow (before dividends) before June 2020 or contract expiry with Air Canada.

If you look at the Bombardier preferreds, they trade at similar levels right now and it was way worst for Aimia after the open. Does that make sense? Is the level of default risk similar???

The EV (excluding the stock) with preferreds at par is around that much. It is a no brainer to stop the common stock dividend, repay debt and try to buyback preferreds on the cheap. That is the best way to retain value for the common long term. What they are doing now is insane.

The ratings agencies will hit them and it will force them to re-look at their strategy. Activists could also show up here with the massive decline in the stock and large volume.

You put a guy like they have at Atlantic Power in charge here and there is something to do with this situation. I also believe that they must have been really stupid in their negotiation with Air Canada to see such backlash. As an Aeroplan loyalty member, this whole thing is concerning to me and I agree that some transition post 2020 will be required.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: Green King on May 11, 2017, 08:40:34 AM
What air Canada is doing sounds insane. How strong is their competitive position? I mean any of the competitors would love to take over its postition and take their recurring customers.

Title: Re: TSX:AIM - Aimia
Post by: Green King on May 11, 2017, 08:46:50 AM
The true profit of airlines is per incremental customer. all the profit is the difference between 90 and 91%.
Title: Re: TSX:AIM - Aimia
Post by: petec on May 11, 2017, 08:48:56 AM
I mean any of the competitors would love to take over its postition and take their recurring customers.

I don't know the market.   Which of their competitors have the same network on the key flights?
Title: Re: TSX:AIM - Aimia
Post by: kab60 on May 11, 2017, 08:49:38 AM
Unless these idiots keep fucking up (paying divys on the commons unfortunately seems like it), I think the preferred is pretty good value here, but it's a hairy piece of shit. As Cardboard said, they spit off cash, so they should be able to pay off the debt completely, and then they still have valuable assets. I really don't understand how the parties haven't come to an agreement, but wouldn't it make sense for Air Canada to just to buy the whole thing now? They just put themselves in a pretty decent bargaining position, and nobody likes building new systems and processes.
Title: Re: TSX:AIM - Aimia
Post by: petec on May 11, 2017, 08:52:41 AM
Aimia also announced the redemption of their 2018 notes - has anyone seen whether that's with cash flows, or with new debt?   If with flows it's good for the prefs.
Title: Re: TSX:AIM - Aimia
Post by: samaniv on May 11, 2017, 08:54:53 AM
Financing maturities profile: The company plans to extend its financing maturities to 2020 with the drawdown of $200 million of its $300 million revolving credit facility.  The proceeds will be used to redeem $200 million of senior secured notes ahead of their January 2018 maturity. This will also have the benefit of reducing the interest rate by around 60bps to 4.4%, whilst maintaining a debt/Adjusted EBITDA ratio of around 2x.

Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on May 11, 2017, 08:55:22 AM
doc75 - could you clarify this:  "Air Miles sure got a lot of bad press and had to make some changes as a result."

I'm not familiar with Air Miles - whose program is this and what happened there?  thanks
Title: Re: TSX:AIM - Aimia
Post by: petec on May 11, 2017, 08:56:14 AM
Financing maturities profile: The company plans to extend its financing maturities to 2020 with the drawdown of $200 million of its $300 million revolving credit facility.  The proceeds will be used to redeem $200 million of senior secured notes ahead of their January 2018 maturity. This will also have the benefit of reducing the interest rate by around 60bps to 4.4%, whilst maintaining a debt/Adjusted EBITDA ratio of around 2x.

Thanks.
Title: Re: TSX:AIM - Aimia
Post by: samaniv on May 11, 2017, 08:59:46 AM
I think the above poster is referring to when Air Miles tried to set an expiry on their points - they received a lot of bad press - and said withdrew their stance on expiring points as a result.

I am very surprised that Air Canada is trying to build their own loyalty coalition. I though it is prudent not to screw with your largest customer. I also though Aeroplan had become somewhat synonymous with Air Canada - so it seems like a new coalition will be a ton of work with a lot of potential to go wrong.

What the hell is AIMIA doing with its capital allocation? They now have a 20% yield on the common - they need to cut that. They should conserve cash..


Title: Re: TSX:AIM - Aimia
Post by: petec on May 11, 2017, 09:02:21 AM
I don't think it will be that hard for AC to build a new programme - they've done it before, after all!

Incredibly dumb of AIMIA to think customers won't change their behaviour.   Worst case is that redemptions accelerate, free cash evaporates, and they realise they should never have paid their float as dividend.   Ought to be conserving every dollar.
Title: Re: TSX:AIM - Aimia
Post by: clutch on May 11, 2017, 09:15:14 AM
Simply put, my thesis was that Aimia was going to renew the contract...I was wrong.

Now that the thesis didn't turn out, I moved on. Can't speculate further on how the management will turn around this situation...

This one stings!!
Title: Re: TSX:AIM - Aimia
Post by: sculpin on May 11, 2017, 09:22:42 AM
Here's what the analysts are saying. Given this news I would have to think there will be a move of shares into potential strategic buyers, activist hedge fund or even private equity who could manage this much better for themselves or shareholders. Bought some preferreds this morning.

GMP Securities....

Aimia Inc.   REDUCE
AIM-TSX   
Last:   C$8.93
Target:   C$4.00
 
Air Canada not expected to renew the Aeroplan partnership; Downgrading to REDUCE
 
Aimia and Air Canada announced today that Aeroplan will no longer be the loyalty program for Air Canada effective June 29th, 2020. Until that date, business with Air Canada is unchanged; Aeroplan members will continue to be able to redeem points for flights with Air Canada and their Star Alliance.

We are changing our rating on Aimia to REDUCE based on the following:

Limited options to replace Air Canada. While Air Canada represents ~10% of revenues, the company is the backbone of the Aeroplan coalition in Canada, where more than 75% of miles redeemed are with Air Canada. Hence, the departure of Air Canada could put the Canadian Loyalty coalition at risk.

Potential member erosion. One of the attractiveness of the Aeroplan program was Aimia’s access to 8% of Air Canada seats at preferential rates. Hence, the departure of the airline partner will reduce the attractiveness of the program and potentially lead to a substantial decline in members.

Near-term pressure on cash flows. We are concerned that Aeroplan members may decide to terminate their membership earlier than June 2020. Hence, the departure of several members could put pressure on cash flows as they redeem their miles.

Potential for departure of other partners. The remaining partners in the Aeroplan coalition are likely to revisit their options given the cloudy outlook, which could result in the departure of other partners.
Recommendation and valuation

Changing our rating to REDUCE and decreasing our target to $4.00. While the impact to Aimia’s near-term profitability may be limited, we believe investors will apply a significant discount to current earnings given the cliff on June 2020. Aimia generates more than 70% of its profitability in Canada, hence with the viability of the Canadian coalition in question, valuing Aimia becomes challenging. We estimate that post Air Canada’s departure, Aimia could generate EBITDA in the range of $150-200m (vs $261m expected in 2017) to which we apply a 7x multiple.

To access the full report and applicable disclosures please click here
To access our full research library or manage your GMP Research profile, please click here
 
Martin Landry
(514) 288 4016
mlandry@gmpsecurities.com

IAS.....

Aimia Inc. (AIM-T, Last: 8.93, Target and Rating under review) – Negative. Focus for today for Aimia is this statement in the Q1 results: Recent discussions lead Aimia to the believe that Air Canada does not currently intend to renew the Aeroplan partnership expiring in June 2020; Aimia is exploring post-2020 alternatives. We did not see this coming. While it’s business as usual for the next 3 years, the real question will be how both companies deal with the end of this agreement. From Air Canada this morning, it sounds like they will continue issuing reward seats to Aeroplan post 2020, which is extremely important. We would expect that the cost of rewards might increase for Aeroplan members (to be in-line with other third-party loyalty programs). The question will be if CIBC and TD cardholders will continue to use these cards in order to collect Miles, and if Amex (which was on a one-year contract) will renew its agreement with Aeroplan. Stock will be off hard this morning. More to come …
Title: Re: TSX:AIM - Aimia
Post by: bizaro86 on May 11, 2017, 09:24:59 AM
I know personally, I will be making very sure I spend all my aeroplan miles on flights in the next couple of years, and will stop trying to earn them immediately. If everyone does that, they could burn through a lot of cash in the next few years.

The downside for Air Canada is that folks will be less motivated to fly them in 2018-2019 to earn points since the points earned in those years will be less valuable going forward.
Title: Re: TSX:AIM - Aimia
Post by: petec on May 11, 2017, 09:27:31 AM
Holding on to my prefs.   Bought them at just over $10 where my thesis was that they would probably be money good if AC didn't renew.   I maintain that view today with an emphasis on the probably.   Key risk is capital allocation.
Title: Re: TSX:AIM - Aimia
Post by: samaniv on May 11, 2017, 09:55:52 AM
Does anyone have any idea what management may be thinking? Why would they not cut the dividend? It does not make any sense from a capital allocation standpoint...  Is their argument that they don't want the stock to drop? They should be focusing on doing what is right for the business not for the stock price...

Even if we end the Air Canada business, I think an argument could be made that ex-AC they have enough revenue to justify their current price?

Even without Air Canada, do you guys think they have enough cash to pay off debt and preferred? I think so.
Title: Re: TSX:AIM - Aimia
Post by: MikeTheCannon on May 11, 2017, 10:06:36 AM
Here's the email Air Canada just sent out:

Earlier today, we announced a big change that we want you to know about.

We announced our decision to replace Aeroplan with a new frequent flyer program that will launch in June 2020 following the end of our commercial agreement with Aimia. As you may know, Aimia has owned and operated Aeroplan for almost a decade.

We are announcing this decision three years ahead to provide as much notice as possible to our customers, employees, and partners.

We are building a new program that will be inspired by you

Over the next three years we’ll be listening to you to build a program that better serves the way you live and travel. Along the way, we intend to make improvements to Air Canada Altitude and other elements of the customer experience.

You can continue to earn and redeem your miles

Through June 2020 Air Canada is committed to business as usual. You can continue to earn and redeem Aeroplan Miles for Aeroplan Rewards, including flights with Air Canada and our Star Alliance partners just like you do today. Aeroplan Miles earned through June 2020 will stay in your Aeroplan account, subject to the conditions of their program, after the new Air Canada program is launched.

After June 2020 miles from Air Canada and Star Alliance partner flights will be credited to the new program, and you will be able to redeem those miles for rewards including Air Canada and Star Alliance partner flights. To get you off to a running start we will have enrollment offers, welcome bonuses and other promotions which will be announced as we get closer.

Keeping you in the loop

You can expect to hear from us regularly in the months ahead as new improvements are launched, and as more details regarding the new Air Canada program take shape.
Title: Re: TSX:AIM - Aimia
Post by: Green King on May 11, 2017, 10:11:00 AM
As far as I can eyeball it they can do a West Jet + American AirLine partnership to replace Air Canada. :)
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on May 11, 2017, 10:15:59 AM
GK - why do you think American Air Lines?  Not disagreeing, just curious about your logic

a while back I read someone (can't remember who) speculate that if AC fell through, they could maybe partner with WestJet and Alaska Air (I think they said Alaska Air based on replicating current routes currently offered thru AC and Star Alliance)
Title: Re: TSX:AIM - Aimia
Post by: Green King on May 11, 2017, 10:26:03 AM
GK - why do you think American Air Lines?  Not disagreeing, just curious about your logic

a while back I read someone (can't remember who) speculate that if AC fell through, they could maybe partner with WestJet and Alaska Air (I think they said Alaska Air based on replicating current routes currently offered thru AC and Star Alliance)

Mostly eyeball. West Jet has Canadian routes and they just need a US partner. Any of US majors would love to fill that spot.
Alaska will also work. The US has bad historically cheap flights as compared to the Canada. People will bid up for incremental fill in capacity.

http://ac.fltmaps.com/en
https://www.westjet.com/en-ca/travel-info/flight-info/route-map
https://www.alaskaair.com/content/route-map.aspx
http://aa.fltmaps.com/en
http://dl.fltmaps.com/en

looks like aa is better here. didn't know that had some many hubs in Canada.

Personally hoping for United Airlines. FIGHT CLUB.
Title: Re: TSX:AIM - Aimia
Post by: Studesy on May 11, 2017, 10:35:25 AM
I just started looking at AIM with the large decline in price occurring today.  I see that prior to the news and price decline, many of you held the Series B Prefs.  Which series do you see as most attractive today? Which series is first in line? Could there be any arb opportunities between the prefs or between the prefs and common? TIA
Title: Re: TSX:AIM - Aimia
Post by: NormR on May 11, 2017, 11:04:36 AM
Um, so why doesn't the firm pay off the debt ASAP, cut the dividend to common AND pref. shares, and struggle through.   
Title: Re: TSX:AIM - Aimia
Post by: Green King on May 11, 2017, 11:09:30 AM
Um, so why doesn't the firm pay off the debt ASAP, cut the dividend to common AND pref. shares, and struggle through.

+1 I also think it is odd since management would have known this day in advance of the dividend decision.
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on May 11, 2017, 11:21:55 AM
What needs to be cut is the common stock dividend or $120.3 million paid in 2016 vs only $16.9 million to the preferreds which is a cummulative obligation if unpaid.

Listening to the call this morning, there was not a lot of questions by analysts that were answered properly and there was a lot of empty, pampering talk over this. I believe that they kept the dividend to soften the blow on the share price but, that is really dumb considering the true impact on the business. They also kept on mentioning that it is business as usual for 3 years and that the ratings agencies would be fine, etc. LOL!!!

Announcing a renewal of the NCIB was also likely done for similar reasons. Please note that they did not buy back any share under the last one as they were keeping cash to redeem the $200 million note in December due in Jan 2017 (that was smart).

Until they find a solution to stabilize the business outlook over the long term and honoring all their obligations, continuing to pay the common dividend is breaching fiduciary duty IMO.

Cardboard

Title: Re: TSX:AIM - Aimia
Post by: samaniv on May 11, 2017, 11:28:25 AM
I guess we can only pray that some activist comes in and forces management to cut their dividend / improves capital allocation.  I also think it is a breach of fiduciary duty to pay all their cash out to common shareholders, essentially screwing the preferred holders.


What needs to be cut is the common stock dividend or $120.3 million paid in 2016 vs only $16.9 million to the preferreds which is a cummulative obligation if unpaid.

Listening to the call this morning, there was not a lot of questions by analysts that were answered properly and there was a lot of empty, pampering talk over this. I believe that they kept the dividend to soften the blow on the share price but, that is really dumb considering the true impact on the business. They also kept on mentioning that it is business as usual for 3 years and that the ratings agencies would be fine, etc. LOL!!!

Announcing a renewal of the NCIB was also likely done for similar reasons. Please note that they did not buy back any share under the last one as they were keeping cash to redeem the $200 million note in December due in Jan 2017 (that was smart).

Until they find a solution to stabilize the business outlook over the long term and honoring all their obligations, continuing to pay the common dividend is breaching fiduciary duty IMO.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on May 11, 2017, 11:45:00 AM
It may be a blessing in disguise to have this happening now or 3 years and change before the expiry vs at the last minute as usual. The discounts on both stock and preferreds are very attractive for a potential acquirer or activist or PE firm and there is a lot of time to make moves.

I was just looking at Club Premier and AeroMexico is part of SkyTeam or Delta. I could see lots of interesting combination to really hurt Air Canada long term with their re-creation of what they did in 1984 or when Aeroplan was formed.

Is there anything that would prevent Aeroplan/Aimia to allow its members to exchange their points for flights at other airlines? I would really love being able to use mine on Delta for example.

Aimia or formerly Aeroplan was also a spin-off from Air Canada in 2005 who wanted to get their hands on precious cash during the heydays of income trusts. They then sold the rest after they were bankrupt for the 2nd time (not the smartest either!).

Another interesting player is Onex which was interested by Aeroplan back in 2003 when the transaction fell apart after Air Canada filed for bankruptcy for the 1st time after acquiring Canadian Airlines.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: petec on May 11, 2017, 12:08:44 PM
Is there anything that would prevent Aeroplan/Aimia to allow its members to exchange their points for flights at other airlines? I would really love being able to use mine on Delta for example.


I don't think there can be.   Points are a currency earned and owned by the members.   And most aren't earned at AC but at via credit card use.   I doubt AC can ban members from spending currency earned on cards at another airline if Aimia does a deal.   One of the Brazilian loyalty schemes has commented that they would be able to transfer to another airline if something similar happened to them.   But the devil will be in the contract detail.
Title: Re: TSX:AIM - Aimia
Post by: fisch777 on May 11, 2017, 12:09:40 PM
Perhaps they can auction all the expensive artwork in the fancy HQ?
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on May 11, 2017, 03:46:04 PM
It may be a blessing in disguise to have this happening now or 3 years and change before the expiry vs at the last minute as usual. The discounts on both stock and preferreds are very attractive for a potential acquirer or activist or PE firm and there is a lot of time to make moves.

I was just looking at Club Premier and AeroMexico is part of SkyTeam or Delta. I could see lots of interesting combination to really hurt Air Canada long term with their re-creation of what they did in 1984 or when Aeroplan was formed.

Is there anything that would prevent Aeroplan/Aimia to allow its members to exchange their points for flights at other airlines? I would really love being able to use mine on Delta for example.

Aimia or formerly Aeroplan was also a spin-off from Air Canada in 2005 who wanted to get their hands on precious cash during the heydays of income trusts. They then sold the rest after they were bankrupt for the 2nd time (not the smartest either!).

Another interesting player is Onex which was interested by Aeroplan back in 2003 when the transaction fell apart after Air Canada filed for bankruptcy for the 1st time after acquiring Canadian Airlines.

Cardboard

At least we dont have to worry about another AC bankruptcy. 

A funny comment from someone on the Financial Post site:  "what does air canada know about loyalty programs.  They haven't got the people moving part down yet". 
Title: Re: TSX:AIM - Aimia
Post by: SafetyinNumbers on May 11, 2017, 09:32:06 PM
Is there anything that would prevent Aeroplan/Aimia to allow its members to exchange their points for flights at other airlines? I would really love being able to use mine on Delta for example.


I don't think there can be.   Points are a currency earned and owned by the members.   And most aren't earned at AC but at via credit card use.   I doubt AC can ban members from spending currency earned on cards at another airline if Aimia does a deal.   One of the Brazilian loyalty schemes has commented that they would be able to transfer to another airline if something similar happened to them.   But the devil will be in the contract detail.

There is nothing that would keep points from being used for other airlines. In fact, half of points are spent now on Star Alliance members or on market fares (effectively cash value). The additional value for points to customers was on the lower priced fixed inventory that AC sold Aeroplan.

I spoke with the CFO for a bit at the AGM today. I suggested strongly that they should kill the dividend on the common and buyback preferred. He suggested there wasn't enough volume in the pref to do that and I clarified I was talking about a substantial issuer bid and not an NCIB. At the very least they should pay off all the fixed debt as soon as possible versus paying dividends on the common.

Perhaps since their attempt to keep the common stock afloat by not cutting the dividend didn't work, they will consider making the right long term decisions!
Title: Re: TSX:AIM - Aimia
Post by: petec on May 12, 2017, 12:18:04 AM

There is nothing that would keep points from being used for other airlines.


Well there clearly is - you can't use your points at Delta, can you?   You can use them with Star Alliance partners because that is explicitly permitted in the AC contract.   What we (I) don't know is what the AC contract says about spending points at non-partner airlines after the contract has expired.   I'm about 80% sure it is unrestricted, but not 100% sure.

Possibly more importantly, how are Aimia communicating this to members?   Because if members THINK their points will be useless for air travel, they may stop collecting and go on a redemption binge.   Which would be VERY bad for cash.
Title: Re: TSX:AIM - Aimia
Post by: clutch on May 12, 2017, 03:57:26 AM
Got this email from them today:

Air Canada announced today that they intend to launch an in‑house Frequent Flyer program. I wanted to personally provide some additional information.

First and foremost, through June 2020, Air Canada and Aeroplan are committed to business as usual. You can continue to earn and redeem Aeroplan Miles for Aeroplan flight rewards, including flights with Air Canada and Star Alliance member airlines — just as you do today.

In addition to the miles you earn on Air Canada eligible flights, you will continue to collect miles from our network of over 75 world‑class partners, representing more than 150 partner brands in the financial, retail, and travel sectors.

With more than 5 million members, Aeroplan is Canada's premier coalition loyalty program, and there is strength in our numbers. Last year, Aeroplan members redeemed for 1.9 million flight rewards, enough to fill 11 Boeing 777s (the biggest plane in Air Canada's fleet) every single day of the year.

We know how much you care about this program, and we're working to secure great new redemption options for you after June 2020.

We are committed to providing the best value for our members. We'll post the most up‑to‑date information and FAQ's on aeroplan.com.

And finally, I'd like to thank you for your continued passion for the Aeroplan program.


Sincerely,
Vince Timpano
President, Americas Coalitions, Aimia
Title: Re: TSX:AIM - Aimia
Post by: SafetyinNumbers on May 12, 2017, 05:34:12 AM

There is nothing that would keep points from being used for other airlines.


Well there clearly is - you can't use your points at Delta, can you?   You can use them with Star Alliance partners because that is explicitly permitted in the AC contract.   What we (I) don't know is what the AC contract says about spending points at non-partner airlines after the contract has expired.   I'm about 80% sure it is unrestricted, but not 100% sure.

Possibly more importantly, how are Aimia communicating this to members?   Because if members THINK their points will be useless for air travel, they may stop collecting and go on a redemption binge.   Which would be VERY bad for cash.

From my conversation with the CFO, my understanding was that there is no restriction post 2020. I'm sure some interesting conversations will start with WestJet who might benefit from having a large customer that knows almost everything about the buying patterns of its biggest competitor's clients.
Title: Re: TSX:AIM - Aimia
Post by: petec on May 12, 2017, 06:01:18 AM
From my conversation with the CFO, my understanding was that there is no restriction post 2020. I'm sure some interesting conversations will start with WestJet who might benefit from having a large customer that knows almost everything about the buying patterns of its biggest competitor's clients.

Great stuff, thanks.

What's Westjet like?   How would Aeroplan members feel spending their points there rather than with AC?
Title: Re: TSX:AIM - Aimia
Post by: clutch on May 12, 2017, 06:09:18 AM
From my conversation with the CFO, my understanding was that there is no restriction post 2020. I'm sure some interesting conversations will start with WestJet who might benefit from having a large customer that knows almost everything about the buying patterns of its biggest competitor's clients.

Great stuff, thanks.

What's Westjet like?   How would Aeroplan members feel spending their points there rather than with AC?

Westjet mostly flies in North America, although they are now planning to expand overseas. So if you fly frequently overseas, most would fly with AC. Also, frequent flyers in general would prefer AC because their Altitude program offers some perks (Maple Leaf lounge access, faster security lane, etc.)
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on May 12, 2017, 06:30:17 AM
From my conversation with the CFO, my understanding was that there is no restriction post 2020. I'm sure some interesting conversations will start with WestJet who might benefit from having a large customer that knows almost everything about the buying patterns of its biggest competitor's clients.

Great stuff, thanks.

What's Westjet like?   How would Aeroplan members feel spending their points there rather than with AC?

Westjet mostly flies in North America, although they are now planning to expand overseas. So if you fly frequently overseas, most would fly with AC. Also, frequent flyers in general would prefer AC because their Altitude program offers some perks (Maple Leaf lounge access, faster security lane, etc.)

I just flew via Delta to and from Las Vegas.  At least thats what the ticket says.  The planes were run by WestJet.  It wont be long before WestJet has some sort of formal alliance.  It will really take off the next time AC goes into bankruptcy. 

It seems like a good fit to me, but what do I know. 
Title: Re: TSX:AIM - Aimia
Post by: sculpin on May 12, 2017, 06:32:13 AM
A point of view from what seems to be the only somewhat bullish analyst at Raymond James. The BofD & mgmt capital allocation (dividends, share buybacks) decisions at this point need to be reversed given the new situation this Company finds itself in.

AIMIA May 11, 2017
Outperform 2
C$7.00 target price ↓

Kenric S. Tyghe MBA | 416.777.7188 | kenric.tyghe@raymondjames.ca
Helen Liu CFA (Associate) | 416.777.7060 | helen.liu@raymondjames.ca
Consumer & Retail

1Q17 Results; Tantrum on the Tarmac

Recommendation

AIMIA’s 1Q17 earnings beat was overshadowed by the unexpected announcement of a
termination of the Air Canada contract, in 2020. While we believe that AIMIA was in an
unenviable position, given the timing of the announcements (and the ease with which Air
Canada could make some intriguing assertions and then go silent), AIMIA could have
mitigated the fallout by providing some specifics on the call (and limit some of the
misinformation that, in our opinion, is fueling the selloff). We are buyers of AIMIA as we
believe: (i) the risks to the economics of the program are smaller than feared; (ii) the
mitigating actions AIMIA can take to manage those risks are many; and, (iii) the reality is
that even beyond 2020 the value proposition of the currency will be at least equivalent to
that of its next nearest competitor in our opinion (all that goes away is the discount on
the classic fares). AIMIA purchases roughly $700 mln a year in seats from Air Canada of
which roughly $250 mln are on the fixed cost (previously classic grid) at a discount (which
in 2020 will be eliminated). We believe that while the discount on distressed inventory
(the additional seats Air Canada needs Aeroplan to fill) is high, that the adjusted EBITDA
headwind beyond 2020 at the midpoint for AIMIA is approximately $55 mln (a very
manageable number versus the fear). There is no risk of a run on the bank.

Analysis

 “Air Canada intends to continue to offer AIMIA redemption seats for Aeroplan
members after June 2020, with pricing competitive with other third-party rewards
programs”. Air Canada intends to offer redemption options because if they don’t,
they have a $700 mln plus revenue hole, which the revenues from their own
program will take years (if ever) to replace. Air Canada is not proposing being
gracious in continuing to offer redemption options -- they simply can’t afford not to.

 “The new Air Canada loyalty program will be focused on improved rewards and
recognition for the Airline’s customers, and will provide Air Canada and our business
partners with significant growth opportunities”. There is literally not a single
precedent we can recall supporting improved rewards and recognition of Airline
managed programs; indeed, the US Airline industry is a case study in the contrary
(with Airlines’ typically devaluing a loyalty currency and using it as a cash cow).

Valuation

Our new C$7.00 target price is based on the average of a 6.0x (10.0x-prior) multiple
on our 2017E adjusted EBITDA and 20% FCF yield (10%-prior). Our target multiple is
less than half its loyalty and transaction processing peer group 2017E average of
12.8x, which we believe is conservative and appropriately reflects the risks
associated with the Air Canada transition through 2020. S
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on May 12, 2017, 06:32:49 AM
Is there anything that would prevent Aeroplan/Aimia to allow its members to exchange their points for flights at other airlines? I would really love being able to use mine on Delta for example.


I don't think there can be.   Points are a currency earned and owned by the members.   And most aren't earned at AC but at via credit card use.   I doubt AC can ban members from spending currency earned on cards at another airline if Aimia does a deal.   One of the Brazilian loyalty schemes has commented that they would be able to transfer to another airline if something similar happened to them.   But the devil will be in the contract detail.

There is nothing that would keep points from being used for other airlines. In fact, half of points are spent now on Star Alliance members or on market fares (effectively cash value). The additional value for points to customers was on the lower priced fixed inventory that AC sold Aeroplan.

I spoke with the CFO for a bit at the AGM today. I suggested strongly that they should kill the dividend on the common and buyback preferred. He suggested there wasn't enough volume in the pref to do that and I clarified I was talking about a substantial issuer bid and not an NCIB. At the very least they should pay off all the fixed debt as soon as possible versus paying dividends on the common.

Perhaps since their attempt to keep the common stock afloat by not cutting the dividend didn't work, they will consider making the right long term decisions!

Lets hope.  Do you think a few emails to investor relations on this from board members might help?
I am going to send one anyway suggesting they kill the dividend until they have made up for the lost business. 
Title: Re: TSX:AIM - Aimia
Post by: petec on May 12, 2017, 06:45:00 AM
Is there anything that would prevent Aeroplan/Aimia to allow its members to exchange their points for flights at other airlines? I would really love being able to use mine on Delta for example.


I don't think there can be.   Points are a currency earned and owned by the members.   And most aren't earned at AC but at via credit card use.   I doubt AC can ban members from spending currency earned on cards at another airline if Aimia does a deal.   One of the Brazilian loyalty schemes has commented that they would be able to transfer to another airline if something similar happened to them.   But the devil will be in the contract detail.

There is nothing that would keep points from being used for other airlines. In fact, half of points are spent now on Star Alliance members or on market fares (effectively cash value). The additional value for points to customers was on the lower priced fixed inventory that AC sold Aeroplan.

I spoke with the CFO for a bit at the AGM today. I suggested strongly that they should kill the dividend on the common and buyback preferred. He suggested there wasn't enough volume in the pref to do that and I clarified I was talking about a substantial issuer bid and not an NCIB. At the very least they should pay off all the fixed debt as soon as possible versus paying dividends on the common.

Perhaps since their attempt to keep the common stock afloat by not cutting the dividend didn't work, they will consider making the right long term decisions!

Lets hope.  Do you think a few emails to investor relations on this from board members might help?
I am going to send one anyway suggesting they kill the dividend until they have made up for the lost business.

Good idea.

Care to provide a template?   It might (or might not?) have more effect if it looked co-ordinated.

P
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on May 12, 2017, 06:47:23 AM
I would Al and I did yesterday.

"I spoke with the CFO for a bit at the AGM today. I suggested strongly that they should kill the dividend on the common and buyback preferred. He suggested there wasn't enough volume in the pref to do that and I clarified I was talking about a substantial issuer bid and not an NCIB. At the very least they should pay off all the fixed debt as soon as possible versus paying dividends on the common."

Thanks for discussing with him SafetyinNumbers and letting us know. The underlined is just amazing to me. How is it that a CFO of what was before this mess a billion dollar company does not know of other means to buy securities than a NCIB?

If he does not like the idea of buying preferreds at a discount then say so but, please do not mention that liquidity makes it impossible...

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on May 12, 2017, 06:54:35 AM
I sent the following note to investor relations:

Dear Ms. Keyes,

I am sure you are awash in many notes from concerned shareholders. 

In light of the rather sudden change in the situation with Air Canada I am surprised that the BOD didn't suspend the dividend on the common shares.  I am also surprised of the intention to buy back stock.  I realize this is an attempt to prop up the common shares.  It hasn't worked, and never works, in any other situation that I have observed in over 20 years of investing.

A better action in my opinion would be to eliminate the dividend on the common and build up cash on the balance sheet while we go through this transition.  I have confidence that Aimia can diverisfy away from its dependence on Air Canada.  It would be nice to know there was an extra 120 million per year to see us into the next growth phase.  The market has already priced the dividend cut into the share price so why not bite the bullet, get it done, and deploy the cash in greener pastures. 

There is also no reason to pay down fixed debt, or buy in shares.  The debt that Aimia carries is cheap in comparison to many other companies. 

The extra cash could be used to develop relationships with other carriers, and invest in the other assets that Aimia has such as those in Mexico. 

I am sure this is in the forefront of managements minds but it may be a good time to explore developing a program with West Jet and Delta. 

Please consider taking this note to upper management. 

Sincerely,

Title: Re: TSX:AIM - Aimia
Post by: Cardboard on May 12, 2017, 07:26:25 AM
Good letter. You may want to send an amendment to suggest buying back preferreds on the cheap. This is expensive debt when you look at it.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on May 12, 2017, 02:56:51 PM
Uccmal-  I applaud this effort to communicate the wisdom of suspending common dividends.  I agree with y'all on that. 

BUT, keep in mind that they declared this dividend before receiving legally-binding notice that AC definitely intends to not renew the contract.  Thus, their decision could have been just posturing in an attempt to seem confident in the event that AC came back to the negotiating table.  Mgmt dropped plenty of hints on the call that - at the time - they viewed this as a real possibility.

And yes, it's possible that they still intend to pay dividends and buyback common shares.  I'm simply suggesting that we not characterize their decision on this one most recent dividend as stupidity.  Let's not even comment on it and just say please don't declare any more divvys for now.
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on May 12, 2017, 03:05:52 PM
Folks - here's my latest thoughts (posted to sumzero.com where I totally nailed the timing on this one ... posted a buy rec on the preferreds just two weeks ago.  I'm sharing it with you in hopes of collecting your reactions - good, bad, or really bad.

Here it is:

it's far from clear to me how much of today's paper loss is really a permanent impairment of capital.

First let's take a quick look at some numbers that might help to estimate the extent of the damage. Aimia gave us a couple useful datapoints yesterday. One is that Classic
Fares represented ~50% of the flight rewards redeemed on Aeroplan in 2016. The other is that Classic Fares represented 1/3 of the $682M that Aeroplan spent on airfare in 2016.


We also know that about 30% of flight rewards are Market Fares (4Q15 presentation). Assuming that hasn't changed much, it seems that 1 - 50% - 30% = 20% of fares are on other Star Alliance partner flights (i had assumed 14%). The cost to Aeroplan for Market Fare flights in 2016 was $185M. Finally, Aeroplan issued 1.9M flights to members in 2016. From all this we can deduce:

                                              % of flights         % of airfare cost          cost ($M)            flights (M)          avg cost/flight
Classic Fare flights                           50%                           33%                     227                 1.0                         $239
Market Fare flights                           30%                           27%                     185                 0.6                         $325
other Star Alliance partner flights   20%                           40%                     270                 0.4                         $710
                                                        100%                 100%                     682                 1.9   

No surprise that flights on other Star Alliance partners are much more expensive - given AC's extensive routes in Canada and the US, almost all of these are probably international flights to some other country. As such, comparing the average cost of these flights to the rest is probably not apples-to-apples. But comparing the costs of Market Fares vs Classic Fares probably makes sense. And there we can see that Classic Fares seem to be priced at a roughly 26% discount to Market Fares (239/325 - 1 = 26%), which is pretty close to my 25% assumption in the writeup .

In their press release today, AC said that it "intends to continue to offer Aimia redemption seats for Aeroplan members after June 2020, with pricing competitive with other third-party rewards programs." I take this to mean rates similar to current Market Fare rates. So all else equal (more on that in a second!), if Aimia took them up on that offer and paid Market Fare rates across the board, that would mean an extra $81M (1/(1-26%) - 1 = 36% increase. $227M * 36% = $81M).

Somewhat surprisingly, management reiterated their guidance for $220M in free cash flow in 2017. An $81M hit to $220M would still leave plenty of room to pay the $17M of dividends on the preferred shares. Of course other things won't be exactly equal, but I think this little excercise helps frame the issue a bit. For a sanity check, note that the analyst at GMP Securities yesterday estimated EBITDA post-June 2020 at $150-200M. With ~$260M of consolidated 2017E EBITDA, that's a hit of $60-110M. The analyst at RBC estimated a hit of $75M to post-June 2020 EBITDA. I don't yet know how they arrived at those numbers, but it seems we're all roughly as crazy.

Aimia needs to either find new airline partners fast (likely WestJet plus a US carrier - perhaps Alaskan Air or American Airlines) or take Air Canada up on their offer discussed above. The former is likely preferable to the latter, because the latter would probably be more expensive and - to a lesser extent - because AC's seat availability will gradually decrease as they allocate to their own FF program. That $2 billion liability for unredeemed flights will actually be an asset in the search for new partners, as it represents a huge volume of business, and selling an otherwise unfilled seat means high margins for airlines.

By laying out the post June 2020 future for the Aeroplan program, Aimia would hopefully avoid a "run on the bank" as members might otherwise feel compelled to use up all their miles in the next 3.1 years. (Note that as a last resort, Aeroplan could always re-write the rules on redemption any way they please, but at the long-run cost of pissing off members.)

The "run on the bank" risk is real, but with just over 3 years to go on the current contract they should have ample time to line up something that preserves the value of Aeroplan miles in the minds of consumers. The bigger risk - I believe - is that Aeroplan card holders start to shift their spending to the other cards in their wallet, causing gross billings to drop overall and particularly with Amex (16% of Aeroplan gross billings), should such a trend cause them to not renew their one-year contract. Thankfully the contracts with TD and CIBC (52% of Aeroplan gross billings) run through 2024.

Finally, Aeroplan does earn some fees for managing AC's FF program, but I doubt the profit (if any) on this amounts to more than $10M and is probably much less. Moreover, mgmt is now guiding to $70M in cost cuts by 2019, with some of that to be realized in 2018. And no, that's not related to the cost of serving AC, as it's coming before June 2020.

Mgmt is drawing $200m on their revolver (which matures in 2020) to help pay off the Jan 2018 notes early and save a tiny bit in interest expense. Somewhat surprisingly, they kept the dividend intact and renewed the common share buyback program. This may have simply been posturing, as they made the decision before AC had (today) sent their legally required notice of non-renewal and management made many hints on the call that AC might simply be "negotiating in public" with their public announcement. Now I think it makes a lot of sense to suspend the dividend (after paying the one they just declared), and either hoard cash or (even better) buy back preferred shares now trading at 10-12% yields. When asked about buying back preferred shares, they basically said no comment - but again, that was before getting the official word from AC.

They're also considering accelerating the existing program of asset sales. Biggest potential sale is their stake in PLM, though I'm not sure they could sell before AeroMexico agreed to an IPO. In any case, PLM is doing great and the US$ 1 billion estimate IPO value (mentioned in my writeup) puts AC's stake at roughly C$ 650M.

Final thought: for what it's worth, I just don't see how Calvin Rovinescu gets to his claimed $2 billion NPV over 15 years from this making this move, unless one or more of the following are true:

a) Aimia will fail to line up a decent contract with a new airline partner(s) and thus continue buying AC flights at whatever terms he dictates (maybe, but I doubt it)

b) AC can create its own full-blown loyalty coalition (which I don't think will be easy)

... and perhaps even sell miles to coalition partners at higher prices than Aimia was getting. I've heard anectodes of US airlines with their own internal loyalty coalitions who supposedly are able to charge a really high spread between the price they get from coalition partners for miles and their cost to provide the flights. I'm talking about a spread way higher than what Aimia gets. Said airlines don't typically disclose such metrics so who knows. In any event, Aimia deliberately lowered their own spread a few years ago as Aeroplan members were starting to really hate Aeroplan. Main complaint was lousy availability of seats ... Aimia fixed this at a cost to its gross margins, but in so doing prevented a decline in gross billings. It was the right move. Not sure how AC could extract higher prices than could Aimia.

The biggest $ savings for AC that I can imagine is more than offset by potential loss of $ from flights redeemed with miles earned with other coaliton partners e.g. TD, CIBC, gas stations and other frequent-purchase retailers. These likely account for well over $400M a year in revenue to AC, often for seats that would have gone unsold.

Not saying he's crazy. Just saying I don't get it. AC has promised to reveal the details on Sept. 19th.
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on May 13, 2017, 08:07:59 AM
Uccmal-  I applaud this effort to communicate the wisdom of suspending common dividends.  I agree with y'all on that. 

BUT, keep in mind that they declared this dividend before receiving legally-binding notice that AC definitely intends to not renew the contract.  Thus, their decision could have been just posturing in an attempt to seem confident in the event that AC came back to the negotiating table.  Mgmt dropped plenty of hints on the call that - at the time - they viewed this as a real possibility.

And yes, it's possible that they still intend to pay dividends and buyback common shares.  I'm simply suggesting that we not characterize their decision on this one most recent dividend as stupidity.  Let's not even comment on it and just say please don't declare any more divvys for now.

Well, I posted the letter here after I sent it.  It was unclear even as of Thursday what the order of operations was.  I dont expect a reply to the letter right now.  I expect they are getting plenty of armchair advice right now.  Management needs to get busy dealing with this contingency, and then communicate their plan to shareholders. 

Perhaps they will come to the realization that the common dividend has to be eliminated for now to reassure shareholders.  I only hold the prefs. so my interests are clear.  I wouldn't touch the common with a barge pole right now.  We have untested management dealing with a crisis.

As to the prefs.  I have a price in mind I would sell at... something around where they traded at before this news.  That would give me a 50% gain on the A's and a 35% on the B's.  Anything lower and I will ignore it.  Some bigger shareholders probably bought the prefs at par and would be mighty pissed at Aimia if they tried to buy them in below par.  If thats the case then I dont see them calling in the prefs. since its cheap financing.  They could try to shrink the float of Prefs. by buying on the open market, which could push the price up.  So, in summary I dont see them calling the prefs, ever. 

At this point its anything goes for the aeroplan division.  It seems unlikely that AC will come back to the table after all of these press releases.  If they do it will be to hire Aimia to administer their own program. 
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on May 19, 2017, 01:46:11 PM
Got some numbers for use in your own analysis...

A) -$78M = incremental cash flow loss from no longer managing AC's FF program.  This is takes all the miles earned by members for flying on AC and calculates how many of these miles are redeemed for flights on AC, for flights on other Star Alliance airlines, and for non-airfare rewards.  I estimate the costs of these to Aeroplan in 2016 were roughly $110m, $33m, $26m respectively, or ~$170m total.  Meanwhile, Aeroplan received $248m in gross bilings from AC.  170-248=-78m

B) -$61M = cost of paying Market Fare rates on all Classic Fares purchased with miles not earned by flying AC.   This number is only relevant if Aeroplan fails to sign on a new airline partner(s), because if they do, they might get a better rate from that new airline(s).  Keep in mind that when AC offered to continue making seats available for Aeroplan members post June 2020, they weren't doing so out of kindness.  Aeroplan paid $434m to AC in 2016 for flights earned outside of AC's FF program.  This would be nearly $500m if all of it had been priced at Market Fare rates.

C) +$70M = Aimia's targeted cost savings in 2019

Clearly there are big uncertainties regarding what other Airlines Aeroplan can partner with, and how soon, and how Aeroplan card useage will change, and how TD, CIBC, and Amex will change their promotion levels for Aeroplan cards.

One way to look at it might be to say that if I'm right about A, B, and C, then just prior to June 2020, runrate Aimia free cash flows would have to drop from around $220m today to ~$86m before coverage drops below 1.0x on the preferred dividends.  (Bonds should be paid off by that point, thus no interest expense.)

Again, that's: 86m runrate FCF prior to june 2020 - 78m - 61m + 70m = 17m post-june 2020 FCF = 17m preferred dividends
Title: Re: TSX:AIM - Aimia
Post by: petec on May 25, 2017, 07:11:18 AM
Do they disclose how many points get redeemed with Air Canada vs Star Alliance?
Title: Re: TSX:AIM - Aimia
Post by: petec on May 25, 2017, 07:25:13 AM

One way to look at it might be to say that if I'm right about A, B, and C, then just prior to June 2020, runrate Aimia free cash flows would have to drop from around $220m today to ~$86m before coverage drops below 1.0x on the preferred dividends.  (Bonds should be paid off by that point, thus no interest expense.)

Again, that's: 86m runrate FCF prior to june 2020 - 78m - 61m + 70m = 17m post-june 2020 FCF = 17m preferred dividends

I am slightly confused by this part.   Surely if 86 is the threshold needed to cover the prefs, the maths is 220-78-61+70=151 meaning the pref dividend is well covered?
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on May 25, 2017, 07:43:38 AM
What a bad management team this is. One has to wonder why Duchesne left for some medical reason a few months back???

They mentioned that they had some plans in case that Air Canada would cancel the contract. Wouldn't it be time to disclose some of these?

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: petec on May 25, 2017, 08:17:53 AM
What a bad management team this is. One has to wonder why Duchesne left for some medical reason a few months back???

They mentioned that they had some plans in case that Air Canada would cancel the contract. Wouldn't it be time to disclose some of these?

Cardboard

That might be quite prejudicial to negotiations, presuming there are any!
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on May 25, 2017, 09:24:52 AM
What a bad management team this is. One has to wonder why Duchesne left for some medical reason a few months back???

They mentioned that they had some plans in case that Air Canada would cancel the contract. Wouldn't it be time to disclose some of these?

Cardboard


That might be quite prejudicial to negotiations, presuming there are any!

The CEO seems clueless but we shall see.  One hopes that it gets through their thick skulls that the common divvy needs to be eliminated until they have lined up replacement business.  The problem with CEOs who come from marketing backgrounds is their lack of knowledge in how markets see their companies.  The market cleary sees the common dividend gone, so get rid of it already. 

Anyway, enough said.  Its been a bad couple of months with my oil stocks treading water, and Aimia blowing up all at once. 
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on May 25, 2017, 12:47:30 PM
petec-   

flights on other star alliance airlines are about 20% of flights but about 40% of cost of flights to Aeroplan.  They're more expensiyeve because these are mainly international flights to destinations other than the U.S.

yes, the pref dividends are well covered barring a severe drop in FCF.  That 220M figure is - IMO - probably optimistic because Aeroplan members will likely accelerate redemptions and use their Aeroplan credit cards less often to some degree given the uncertainty of what Aeroplan points will be worth in 3 years.  Hard to say what the extent of this will be.  Clearly if mgmt can line up attractive new airline partners soon they will put members' concerns to rest. 
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on May 25, 2017, 12:54:06 PM
Cardboard & Uccmal-

The new CEO was the former CFO.  his background is finance, not marketing.  I don't have any reason to think he's clueless on the dividend - the last divvy was declared before AC officially declared intent to not renew, and he may have been just trying to play it cool as a result.  we shall see.

Aimia is undoubtedly talking to potential airline partners right now and thus can't comment on what the post june 2020 flight options will be.  I suspect that Westjet is the main potential partner.  also think they're talking to other Star Alliance airlines since they've done business with them for years and some of them (e.g. United) already have a significant number of routes that service Canada.
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on May 25, 2017, 01:41:31 PM
Cardboard & Uccmal-

The new CEO was the former CFO.  his background is finance, not marketing.  I don't have any reason to think he's clueless on the dividend - the last divvy was declared before AC officially declared intent to not renew, and he may have been just trying to play it cool as a result.  we shall see.

Aimia is undoubtedly talking to potential airline partners right now and thus can't comment on what the post june 2020 flight options will be.  I suspect that Westjet is the main potential partner.  also think they're talking to other Star Alliance airlines since they've done business with them for years and some of them (e.g. United) already have a significant number of routes that service Canada.

I am only going by his bio from the website:

David Johnston was appointed Group Chief Executive in May 2017. In this role, he is responsible for driving further development of Aimia’s global operating model and performance, with all operating divisions reporting to Mr. Johnston. Mr. Johnston is also responsible for the global business development team who plan and execute the expansion of Aimia’s full suite strategy into new territories. Prior to this Mr. Johnston was President and Chief Executive Officer, EMEA and Executive Vice President from January 2010. In this role, he had full responsibility for driving the expansion of Aimia's businesses in the EMEA region including Nectar, Nectar Italia and Air Miles Middle East as well as all of our proprietary loyalty and loyalty analytics businesses in the region. Mr. Johnston joined Aimia from PepsiCo where he spent 13 years in Marketing and General Management. He has had extensive global experience in PepsiCo in Europe, Latin America and in PepsiCo's global headquarters in Purchase, New York. He holds an Honours Degree in Business from Nottingham Trent University in the United Kingdom.
Title: Re: TSX:AIM - Aimia
Post by: petec on May 26, 2017, 03:22:52 AM

flights on other star alliance airlines are about 20% of flights but about 40% of cost of flights to Aeroplan. 

That's quite good news.   If 40% of the value that members see in flight redemptions is with SA not AC, it's that much easier to port them to another airline (so long as it is an SA partner or equivalent).
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on May 26, 2017, 08:12:49 AM
https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aAIM-2474548&symbol=AIM&region=C

Nothing like the confidence of a CEO... Dumb  ::)

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on May 26, 2017, 08:42:13 AM
well, he could say the sky is falling and we're doomed, then call westjet or united and tell them that Aeroplan will have no issues paying for flights.  that'll work just fine.
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on May 26, 2017, 09:17:56 AM
well, he could say the sky is falling and we're doomed, then call westjet or united and tell them that Aeroplan will have no issues paying for flights.  that'll work just fine.

Lol...
Title: Re: TSX:AIM - Aimia
Post by: Cardboard on May 26, 2017, 10:37:18 AM
He should disclose some of the options that they are looking at. And stop the dividend until the business situation has stabilized with a real long term plan.

Air Canada did not hesitate to go public and tell Aimia that they would stop using them. They should also mention publicly, and to their investors, what they intend to do.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on May 26, 2017, 04:09:04 PM
What Air Canada is thinking...

this might all boil down to Westjet's announcement on May 2nd that it has ordered 10 Boeing 787s, with an option to buy 10 more.

Westjet was launched in 1996 with a Southwest-style strategy of only flying 737s and offering only one class of seats.  though they introduced "Plus" seats with a bit more legroom in 2013, these weren't a big change (extra cost of only $45).  This formula allowed them to be profitable on a fairly consistent basis for 20 years - no small feat for an airline - I never expected them to change it.

So until now, AC has been the only game in town for business class travel on a Canadian airline. 

The 787 changes all that as it allows for full lie-flat seats - nice enough to allow Westjet to charge full business-class rates for the first time (and also to greatly expand it int'l routes). Business class travelers are where the big bucks are for traditional airlines like AC.  Meanwhile, AC's current arrangement with Aeroplan doesn't (I'm guessing) give them enough flexibility to prioritize their FFs when it comes to flight availability (vs all the other Aeroplan members).  With their main rival now going after their golden goose, AC probably decided to greatly up its demands in talks with Aimia, and Aimia balked.

Perhaps this would explain why AC never once publicly mentioned the possibility of not renewing the Aeroplan contract all the way up thru mid-march - then ~3 weeks later suddenly announce that a break with Aeroplan will add $2 billion of NPV to their company's value.  AC's market cap was ~$3.6 billion prior to this announcement, so that would be an increase north of 50%.

 
Title: Re: TSX:AIM - Aimia
Post by: bizaro86 on May 26, 2017, 10:24:33 PM
Meanwhile, AC's current arrangement with Aeroplan doesn't (I'm guessing) give them enough flexibility to prioritize their FFs when it comes to flight availability (vs all the other Aeroplan members).

This part isn't true. Air Canada gives priority access to business class seats to its most important (super-elite) customers. The details are below. They do it through their elite recognition (altitude) program, which they separated from Aeroplan a few years ago. That decision was probably writing on the wall they wouldn't renew.

https://altitude.aircanada.com/status/priority-rewards

Title: Re: TSX:AIM - Aimia
Post by: Uccmal on May 30, 2017, 05:00:44 AM
Reply to my letter.  Pretty boilerplate.  I suspect we see a cut before or at the next Q's earnings. 

"Thank you for your email and apologies for the delay in getting back to you.
 
We are taking on board all comments and appreciate you sharing your feedback with us.
 
To clarify, the dividend declaration was made before we received formal notification from Air Canada and the Board reviews the dividend every quarter.
 
As discussed on our recent Q1 2017 conference call, a key priority for us right now is to ensure a strong redemption offering post 2020. Remember our contracts with TD and CIBC run to early 2024 and members continue to have access to rewards on Air Canada until 2020 under our existing contract (and beyond if Aimia decides that is the best outcome for members and shareholders). 
 
We will share more information with the market as soon as we are able to.
 
Kind regards.
Tom"

From Tom Tran
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on May 30, 2017, 10:48:59 AM
bizaro- 
thank you for bringing this up, but I have to disagree.  For every class of Elite members, they begin with the sentence, "In the event that Aeroplan Fixed Mileage Flight Reward seats are completely booked..."

in other words, under the current arrangement, it doesn't matter whether an Aeroplan member is also an Elite member of Altitude in terms of access to Classic Fare (the deep discount) seats on Air Canada.  Only when Classic Fare seats are all taken do these Elite privileges kick in.  I suspect Air Canada wants to give these Elite members better access to the best seats in order to keep business travelers from switching to Westjet, now that Westjet is going to be offering true business class seats.

also, see Mark Satov's comments in the globe and mail article from Saturday (link is in my next post)
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on May 30, 2017, 10:57:52 AM
Here's an interesting tidbit from Aimia's CEO in the Saturday's Globe and Mail (emphasis mine):

“Our members are sitting on a balance of something like 200 billion unredeemed miles. That’s a huge amount of traffic that can be directed into other partners – whether that’s other airlines or other partners more broadly. ... That’s miles of travel that they’re going to take at some point in the future. That traditionally went to Air Canada and it now can go toward Air Canada, and some of the alternatives that we’re going to be working on.”

http://bit.ly/2rkhso6

my take on this is that they're looking at potentially adding more non-flight rewards (cruises perhaps?).  more importantly, this would seem to confirm that they will, in fact, take Air Canada up on its offer to continue selling seats to Aeroplan members (albeit at higher prices than the current Classic Fares).
Title: Re: TSX:AIM - Aimia
Post by: clutch on May 30, 2017, 11:09:50 AM
Here's an interesting tidbit from Aimia's CEO in the Saturday's Globe and Mail (emphasis mine):

“Our members are sitting on a balance of something like 200 billion unredeemed miles. That’s a huge amount of traffic that can be directed into other partners – whether that’s other airlines or other partners more broadly. ... That’s miles of travel that they’re going to take at some point in the future. That traditionally went to Air Canada and it now can go toward Air Canada, and some of the alternatives that we’re going to be working on.”

http://bit.ly/2rkhso6

my take on this is that they're looking at potentially adding more non-flight rewards (cruises perhaps?).  more importantly, this would seem to confirm that they will, in fact, take Air Canada up on its offer to continue selling seats to Aeroplan members (albeit at higher prices than the current Classic Fares).

The problem is, non-flight rewards in general are so horrible in terms of their values that there is no incentive for anyone to continue using Aeroplan. It'd be pretty much similar or worse than other travel points programs.

So I think they really need an airline rewards alliance to keep its customers...
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on May 30, 2017, 11:14:46 AM
clutch, I agree.  Non-airfare rewards have higher average gross margins than airfare ... not so high that I'd use the term "horrible" but whatever.

I definitely think the vast majority of points/miles will still be redeemed for airfare under whatever new options Aeroplan comes up with.
Title: Re: TSX:AIM - Aimia
Post by: Cigarbutt on June 02, 2017, 01:09:38 PM
I’m in. Long the A, B and C preferred shares. Here’s why.

Looked at this a few times in the last years. Missed the AIMIA preferred 2016 opportunity despite 1- obtaining an easy +/- 17 % total return on FFH preferreds (Cs and Ms) pretty much around the same time during the institutional sway in CDN preferreds and 2- looking in some depth at AIM (I was looking at the common share opportunity) around the same time. Retrospectively, if I had “seen” the preferreds opportunity, I think I would have bought. Like to think that I would have sold during the upswing but not sure…

The AC announcement was pretty much unexpected (early and not favorable). The big question is: can they adapt/react to the new circumstances? I think they can and that means upside potential for the preferreds.

Sorry, very long post. My style. If you don’t like it, just move on.

Disclosure:
-I have read a fair amount about loyalty management but I’m no specialist and have no specific practical work experience in the loyalty business.
-There are some aspects of the industry that I don’t understand well (analytics service aspect).
-The main component of loyalty business is based on contracts that share value provided by the loyalty program and that are not disclosed. Indirect ways to deal with that limitation is evaluating the historical record and business acumen of leaders. Still, mostly asymmetrical information and guesswork.
-This is not an investment for the long run. More of an expected return towards intrinsic value type of investment.

Topic #1: trust in management

They certainly look like deers looking at headlights right now and the recent “business as usual” comments don’t help with the market perception and the capacity of management here will be key.  There are some unknowns, especially the new CEO, David Johnston.

David Johnston came to Aimia in 2010 with international marketing background. He first headed the EMEA division, including Nectar UK then became COO and interim CEO. Not enough info to make up my mind. Performance at Nectar UK can be analyzed (see below topic #4) after 2010 and results are fair (positive trend but variable and future somewhat unclear). Jan-Pieter Lips, who was one of the founder of Nectar UK in 2002 and who had risen to president of Aima’s international coalitions segment, just left the company…So this is an area where more work has to be done.

Somebody mentioned Tor Lonnum (CFO) and he seemed to have done a good job with Tryg, the Scandinavian insurer. I decided to look into this as 1- it is relevant (the Aimia CFO may have to seriously look at, and implement different alternative financial strategies going forward) and 2- one of my interests is property/casualty insurance. I understand that Mr. Lonnum came to Aimia for the international challenge. Ready for adversity?

Here’s a relevant summary of my research. So, Tryg is a P+C Scandinavian insurer based in Denmark. The P+C industry in Scandinavia is characterized by a relatively captive oligopoly. Tryg has been one of the four main players. For the last 10 years or so, most players have used similar strategies (focus on profitability for underwriting (premium increase and expense control) and mostly stable or slowly rising premium levels). They show similar patterns in underwriting results, return on equity and dividend payout but there are differences. Tor Lonnum came to Tryg in September 2011 and left (his decision to come to Aimia) in April or May 2016. Overall, my opinion, based on the analysis, is that he did a very good job on an absolute and relative basis. Obviously, decisions taken before he arrived and factors outside of management control during his tenure can have an impact on results but, as a CFO for almost 5 years, I submit that he had a significant influence on results. Let’s see. I looked at industry reports and Tryg/competitors annual reports (some competitors are subs, so data sometimes not completely or easily comparable). I also used, for comparative purposes, the 2007 to 2011 calendar years and compared key performance indicators with the 2012 to 2016 period. For Tryg, the average combined ratio for 2007-2011 was 91,4 and for 2012-16 was 87,7. The arithmetic ROE average for 2007-2011 was 14,9% and for 2012-16 was 22,3%. Comparison with competitors show that, in general, the CR and ROE numbers improved during 2012-6, but improvement was more marked at Tryg, especially for the ROE component. Perhaps relevant to Aimia is the fact that Mr. Lonnum was instrumental in driving costs down in order to improve the CR. For instance, in 2011, gross written premiums were (in Denmark currency, million krones) 20 822 and there were 4300 employees for a ratio of 4,8. In 2016, GWP were 17 842 and there were 3264 employees for a ratio of 5,5. My understanding is that Mr. Lonnum played a key role in underwriting discipline (reduced premiums in a mature market and a clearly laid out a plan of cost reduction measures including staff reduction). My take is that one of the reasons that the ROE improved (on an absolute and relative basis) was because of the CFO’s role in the capital allocation decisions related to capital levels, dividend policy and share repurchase decisions. Also, Mr. Lonnum contributed to clear and transparent policies related to dividend payout versus capital available, earnings for the period and outlook. I submit that this will be crucial for Aimia going forward. During his CFO tenure, Tryg obtained an upgrade from rating agencies and total share return was positive on absolute basis and quite robust on a relative basis. Assuming a stock split did not occur, share price when he arrived was around 280 DKK. When he left, share price was around 650 DKK and 97 DKK were distributed as dividends along the way. Personally, I’d be happy with +/- CAGR 25% over 4-5 year periods. But I’m just a guy glaring at a screen right now. I like what Mr. Lonnum has done at Tryg and see him as a positive contributor going forward.

Robert Brown is the Chairman of the Board of Aimia (Chairman since 2008 and director since 2005). I have followed his career over the years. I have read and listened to what he has/had to say about Aimia and I have decided to trust him. Mr. Brown’s record is not perfect but he has shown good abilities during tough times elsewhere. He will be a key player during the next transition. He was with Bombardier for many years and was the main factor behind the success of the regional jets. He left Bombardier in 2002 because it was felt that the company needed new direction (Paul Tellier took over). With Bombardier (still family controlled and Mr. Tellier also had to leave when his visions differed from the Family), decisions are not always based on a transparent process. Mr. Brown was also on the Board of Nortel (2000-2006). His role there was neutral… He was involved with Air Canada during the restructuring (Chairman AC 2003-4 and on Board of ACE 2004-9).  One can be critical of the restructuring process but overall (with Milton and Rovinescu as the main man, “iron fist”), it can be considered a “success”.  It was in 2005 that ACE did the Aeroplan IPO and then progressively sold its remaining stake. A key relevant part of Mr. Brown’s career pathway is when he took over CAE (CEO 2004-9). CAE (mostly flight simulators and related training) was heading in the wrong direction (even if slowly recovering from the 9/11 downturn, there were questions regarding the quality of earnings and strategic vision). The context of Mr. Brown’s arrival implied a need for restructuring and judicious diversification. His plan worked well and rapidly. My opinion is that his tenure at CAE was impressive. He predictably left in 2009 (not a great time to leave if you look at market-based indicators). From 2004 to 2009, revenues went from 940 millions to 1,7 billion and net debt went from 530 millions to 285 millions. I submit that Mr. Brown will be a key player for the challenge(s) facing Aimia. He is a quiet force, understands the key variables, can take difficult decisions, has been successful in tough restructurings and is modest. The kind of person I want to partner with in these situations (my opinion, not worth very much by itself). We’ll have to see how this plays out.

I also like Micheal Fortier who has been on the Aimia Board since 2009. He’s also on the nominating committee.

Other relevant comments about key management people would be helpful.

From the transcript of Rupert Duchesne at the CIBC EASTERN INSTITUTIONAL INVESTOR CONFERENCE held on September 21, 2016.
Relevant excerpts :

« It's been a very successful contract. There's still four years left to run. Clearly there's been
a lot of noise around it and a few comments made in public. We've got a pretty good history of
mega negotiations.
 Without getting too personal, we had a fairly big negotiation with CIBC and TD a couple of
years ago that ended up in a place, I think, better than most people expected for us. I actually,
frankly, lost a little more sleep over that than I will lose over the Air Canada negotiations because I
think there's actually a really good balance of power between the two of us. »
« It was a smart contract 15 years ago. I negotiated it, Calin was involved, so we both had a
say in that, but the world has moved on a great deal. And I think there is a lot of room for a different
approach to running the business. »
« —or whoever else. So I think the stage is well-set. When they're ready and when we're ready we'll
get into a negotiation. (***) But I think the prospect of a divorce would be so horrible for both parties
that we'll actually get to a fairly straightforward deal.   (my ***)

So, I think Aimia: -overestimated the strength of its negotiating power, -underestimated AC’s intent to go after risk AND reward AND -are NOT prepared.

In my humble mind, the CEO remains a question mark at this point.

The investment thesis is based on the following for topic #1: Better than average management is needed. I assume that, either top management will deliver or change needs to occur rapidly.

Topic #2: moat of loyalty programs and value without a core frequent flyer component

There is that love/hate relationship with loyalty programs that reminds me of the dynamics with credit card issuers. People “hate” them but are heavily influenced by them. That won’t change and, with data analytics (consumer data), the trend should continue to be favorable for loyalty programs. Customers are not necessarily loyal, negative (extractive) aspects of these programs frequently resurface and many cards stay in wallets but good loyalty programs are efficient ways to extract value from customers and infringe consumer surplus. Well designed loyalty programs have value. The questions are: how to appropriate the value, proprietary or coalition? And how to share the value if an intermediate agent is used? My opinion is that Aimia is likely to continue to play this game profitably even if the recent AC announcement leaves some questions unanswered at this point.

For reference of general industry trends: see pages 14-17
http://www.finaccord.com/documents/report_prospectus_global_coalition_loyalty_programs.pdf

Recent survey:
http://strategyonline.ca/2017/05/24/is-your-loyalty-program-satisfying-your-customers/

To outsource or not is a recurring theme in this fluid environment and it comes to a question that each and everyone of us ask ourselves from time to time. Should I do it myself or should I pay somebody else to do it for me? For those interested, here are a few examples of commercial loyalty relationships that got or are getting redefined. Recently Metro, a grocer, has been going through this kind of questioning: proprietary vs Air Miles. Westjet went through this when it left Air Miles a few years ago and started its own rewards program in 2010.  Sainsbury (grocer) left Air Miles UK before joining Nectar UK in 2002 and became an “anchor” partner. In 2009, Nectar UK recruited Homebase (#2 hardware retailer in the UK) at a time when Homebase had its own proprietary reward program (#4 position in loyalty programs in UK then, based on number of members). Homebase recently changed owner and is leaving Nectar UK in 2017. Anybody with relevant knowledge from these or similar scenarios should pitch in. From my point of view, in another life and for many years, I was involved in a business whereby large and medium firms could do work in-house, could delegate some work or could outsource completely a specialized part of human resources management. These market segments are constantly redefining as contracts are typically short term in nature and as contract renewal is never guaranteed. The moat is hard to define and is based on specific people/culture involved. This helps to understand the high level of goodwill and intangibles found on the balance sheet of Aimia. My opinion is that some loyalty programs provide little or no value especially the proprietary subtype. Loyalty programs, especially the coalition type, need specialized service that is very hard to develop in-house. I submit that the key is to create value (customer loyalty) AND to share this created value (reasonable win-win) between the 3rd party (Aimia) and the retailer/airline. On balance, I find that Aimia has done this quite well over the years.  Aeroplan started very small and maybe Rupert Duchesne was just the guy at the right place and at the right time when AC had to let go of this unit with a knife on the neck. Circumstances that existed then versus the negotiation power between AC and Aeroplan gave way to very favorable terms for Aeroplan. Aimia was able to earn abnormal profits for a long time. My opinion is that this aspect of the business was well managed. Somehow, new more balanced terms had to be negotiated (to share more with AC). Maybe, Aimia was too rigid. More likely, I think that AC had come to think that they were not in the sharing mood anymore. So now, there is a big bump on the road.

Air Canada announced that they will start their own proprietary program (more on that below, topic #3). If AC leaves Aeroplan as a core partner, one has to evaluate if there is room for two national loyalty programs in Canada, which is considered mature for this market. Not sure. I appreciate attempts by some to analyze (quantitative) the cash flow impact after June 2020. Very difficult exercise. It’s like if you ask a grocery store owner to evaluate the value of losing the right to sell beer and fresh products. It’s not simple math. Losing a core aspect of your earning potential could be lethal. My opinion is that there would still be value after but it would be a small fraction of what it is now. Not sure fixed costs would be covered. This opinion is based on static conditions. Of course, the situation will be dynamic.

One of the potential problems is that this is a business based on cash flow coming from gross billings. The model would not work well in a run-off mode and the downward spiral would be compounded by customers redeeming points more rapidly. This is loyalty business and management have to avoid trust erosion in the brand. There is the usual stickiness and resistance to change but participants have questions and will look for alternatives. Potential death spiral unless management has something to show. Timeline is not days and maybe not even weeks but my take is that light has to be seen at the end of the tunnel before next fall. Renewal and non-renewal of commercial partners are relatively expected in this business. However, in this specific case, AC was the core partner for the CDN loyalty unit, which was the primary cash flow driver for the entity and this why management have to show how the transition will be managed. See topic #4.
The investment thesis is based on the assumption that, on balance, the Aeroplan plan has value and alternatives (with AC, other airline partners or other partners) will likely compensate at least partially the business lost with AC as defined by the present contract. This is still unknown, is uncomfortable but represents a real opportunity (more on that below, topic #4).

Title: Re: TSX:AIM - Aimia
Post by: Cigarbutt on June 02, 2017, 01:10:22 PM
Part 2

Topic #3: timing and nature of Air Canada’s announcement

Somewhat unusual. Isn’t it? However, when you look at AC’s history and Mr. Rovinescu’s “strategies”, it makes more sense. Just think of what happened to Aveos. In 2007, Air Canada spun off its in-house maintenance, repair and overhaul (MRO) unit, Air Canada Technical Services, as a separate company.  It then stopped sending work there and the unit went bankrupt…It is ironic that AC recently negotiated litigation termination around this issue with the government in exchange for an engagement for maintenance of C-Series planes bought on discount. Air Canada’s business has been up and down but they sure do know how to squeeze the lemon sometimes. In the Aimia case, do not expect sentimental business dealings for the “loyalty” component that had been spun off many years ago. However, whichever form the AC loyalty program takes may give rise to opportunities for Aimia.

Another relevant historical example has to do with what happened to the contract between AC and Jazz air (regional carrier, became Chorus Aviation in 2010). Jazz Air was the result of another of these moves made by AC during its corporate restructuring. Under ACE, in 2006, Jazz Air became an income trust and obtained a relatively favorable arrangement with AC that became over the years an increasingly high and no longer necessary burden. The last contract was supposed to last until 2020. What did AC do? The story, in fact, is quite interesting and possibly relevant. My take, from public disclosures, is that, in 2015, “unscheduled” negotiations occurred and a new agreement was pretty much imposed by AC resulting in an extraction of about 550 millions for the following 5 year period in favor of AC. During negotiations, AC had mentioned the possibility of going to alternative regional providers… and, in fact, did to a certain extent for the US routes without getting Chorus involved in the bidding…I don’t know what was said behind closed doors (I only wish I could be in some of these board rooms when these things happen), but Chorus Aviation announced that the “new agreement” was a “win-win”. BTW, Since the new agreement, AC has done better than Chorus but Chorus has continued to thrive despite “adjustments” to their contract with AC. History does not repeat itself, but it often rhymes. You’d think that you need to watch House of Cards to get this kind of entertainment. For the aficionados, Fairfax has held shares of Chorus around 2012 and recently participated in a convertible debt investment in the regional carrier.

The fact that this announcement is made years in advance is a good thing. It gives time for interim cash flows to accumulate and gives times to assess alternatives including a new form of partnership with AC.

AC sees now the loyalty component as a significant profit center (just look at the financial statements of Aimia (Aeroplan segment) for the last few years; enough for any capitalist to salivate). But setting up an in-house proprietary system takes time, talent and money. The program may not be as successful as predicted and there may be negative reactions from airline customers. Also, the present arrangement with Aimia has advantages to AC that will be lost (guaranteed cash flows, partnership with a loyalty currency, ties with major credit card issuers and others) when the present deal finishes in 2020. Aimia was spun-off from ACE even if cash flow positive because the parent needed immediate monetization during the restructuring process. Now, AC has funds to develop its own program. That situation may change. As we all know, the airline industry is very cyclical. In the next few years until 2020, in the event that AIMIA does not find an airline core partner, maybe AC would be more open to negotiations (share the value) if short term cash position becomes again an issue. But we don’t hope for a major downturn or a threat of bankruptcy, don’t we?  Something to consider nonetheless. Interesting to remember that, as recently as 2009-2010, Aimia lent 150 millions to help AC “get through a difficult period”.

In fact, if the loyalty program has so much value for AC (“ 2 billion over 15 years” BTW, I ran some IRR/NPV numbers using some inputs from a CIBC analyst report and find that this is still largely hypothetical), why don’t they buy Aimia at present market based enterprise value and then opportunistically sell the international subs after (UK Nectar, Air Miles Middle East, and Club Premier and else). If Aimia management has aces up their sleeves, then we can all relax. Otherwise, especially if the 2019 Sainsbury renewal (anchor partner in UK) is at risk, they need to be pro-active and creative. Why not propose to AC a joint partnership type of arrangement (à la Club Premier with Aeromexico) with AC having 51% and Aimia 49% of a new entity responsible for the Canadian loyalty program. Aimia would lose control but would survive and would allow the CEO to save face as he could still lead the rest of Aimia including the Europe and Middle East unit. There are many ways to skin a cat. A risk of a definite non-renewal definitely exists if positions become entrenched and/or if there is procrastination. But both Aimia and AC need to remember that value will be lost if the partnership ends. The best scenarios (even if relatively disadvantageous to Aimia) involves somehow the maintenance of the Aeroplan brand. This would also be a way to recover the value implicit in the contracts between the credit card issuers (CIBC, TD and Amex) and Aimia. My opinion is that AC is well positioned to negotiate, has made a move (somewhat risky, not exactly gentleman-like but not unusual for them) to put the screws on its old ally and Aimia has the most to lose and will have to compromise. But, we are still in the first innings.

In 2016, after winning an award, a journalist asked the following to Calin Rovinescu: “In the past seven-plus years, you’ve definitely gone through some turbulent times. What have you learned about yourself?” His answer: “Well, there’s a line from a poem that somebody, my sister, in fact, gave me on my high school graduation and it’s stuck with me: Out of adversity comes strength. You have that notion that the greater the adversity, the greater that people’s personalities are going to come out, and you don’t have to compromise your values and your principles as you’re actually going through that level of adversity. ” Rupert Duchesne is said to have used sophisticated scenario planning models in order to prepare for “black swan” events such as can occur from possible outcomes of business negotiation. These models have costs but “those costs help insure the company against surprises”, said he.

Well, to some extent, we’re in uncharted territory here.

See the following links for perspective on 1- the airline loyalty business history, on 2- why the loyalty unit, which were initially created to increase loyalty, eventually became identified as profit centers, on 3- why AC may want to start their own proprietary program, on 4- the challenges that AC faces in setting their in-house program and on 5- valuation issues.

http://www.wns.com/Portals/0/Documents/Whitepapers/Revitalizing-Airline-Loyalty-Frequent-Flyer-Programs-Travel-and-Leisure.pdf?timestamp=1449570172526
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Consumer-Business/gx-cb-living-the-dream-or-just-dreaming-070915.pdf
http://www.ey.com/Publication/vwLUAssets/etude-ey-sur-les-programmes-de-fidelite-des-compagnies-aeriennes/$FILE/etude-ey-sur-les-programmes-de-fidelite-des-compagnies-aeriennes.pdf

Any relevant comments on other publicly listed coalition firms (Multiplus and Smiles in Brazil) would be appreciated.

Please note that the third link is dated. In 2015, Ethihad (airline) bought Alitalia’s FFP at much lower multiples.

Please also note that valuation parameters described involve the “potential” value of frequent flyer programs.

I submit that, on balance, even if this announcement is quite negative to Aimia, the timing now versus later gives time to look at alternatives. Three years is a very long time. Anything can happen but my opinion is that this is a window of opportunity going forward that is a net favorable (using now as a reference point) to Aimia. Time will tell.

Potential opportunities could come from low cost carriers who may already have some kind of frequent flyer programs and who may want to expand in Canada. Southwest is interesting (2018-9). Westjet, who knows?

https://www.aimia.com/content/dam/aimiawebsite/CaseStudiesWhitepapersResearch/english/AirlineLoyalty_LowCostCarriers.pdf
https://www.usatoday.com/story/travel/flights/todayinthesky/2017/05/17/southwest-airlines-says-hawaii-flights-priority/101808310/

The investment thesis relies on the fact that three years is a long time. Aimia is likely to find alternatives. I think that somehow AC will eventually openly recognize Aimia’s expertise and existing infrastructure. The brutal announcement is a statement that underlies the fact that the return for Aimia, whichever scenario plays out, will be much less and perhaps much much less but my take is that there is a sufficient margin of safety for the preferreds.

Topic #4: preferreds, the place to be?

Let’s look at numbers. Again, attempts by others to quantify this are much appreciated.

Looking back, I agree that Aimia management does not look stellar for all aspects and the compensation levels and trend for top executives does not seem tightly connected to underlying economic fundamentals. One also has to wonder about some aspects of capital allocation. The new cost consciousness seems to be a priority but is not meshed within their DNA. The new CFO may bring some discipline. And insider ownership is relatively quite low. But there many things that they did well. See below.

I have looked back at financials and have prepared a summary of findings for fiscal years 2008-2016 (9 years). I checked my numbers carefully but cannot guarantee precision. Please do your own due diligence.

Positive cash flows (consolidated and cumulative):

-CFO: 2596 millions
-preferreds issues, net: 318,4 millions
-share issues (compensation): 28,3 millions

Total: 2943 millions

Negative cash flows (consolidated and cumulative):

-capex: 493,6 millions
-net debt decrease: 248 millions
-acquisitions: 475 millions
-share repurchases: 607,8 millions
-dividends (CS and prefs): 1110,4 millions (more than 90% of this amount for CS div.)

Total: 2935 millions

What are the “messages”?

The business model (with the core airline partner on board) produces very significant cash flows with little need for capex.

I like that and I understand AC’s goal to repatriate the program in-house in order to make $.

Some of this cash flow potential will be lost (net result) if the Aeroplan brand is completely separated from AC.

Overall, the net cash flows have been fairly consistent and recurrent. In the last years, there has been a slight negative trend likely because of improvements of terms and conditions for the redeemers but this trend has stabilized recently and maybe is improving because ? of cost measures and focus on core business.
BTW, for the same period, the cumulative “adjusted” EBITDA comes to 2564 millions which is comparable to CFO and which, despite obvious limitations, validates to a certain degree this measure of performance used by management.

Acquisitions and other “investments” on balance have not been significant contributors to the bottom line. Some maybe. A clear exception is Club Premier in Mexico. As some have mentioned (and see link mentioned above, EY publication), there are some market inputs that allow a rough valuation and it is significant.
Debt has been coming down and will likely continue to go down, given the present context. I submit that their debt management has been smart, especially in this “new era” of the ultra low interest rates. After 2009, they switched bank debt for a reasonable amount of public debt issues with extended and laddered maturities and fixed rates. They also issued preferreds. For a few months, they have not bought back shares. Overall, this results in a certain amount of financial flexibility now. In that limited sense, they were “ready”.

From an enterprise value point of view (ie not the subjective point of view of the preferred holder point of view only), the next logical step would be to cut the dividend on the common stock. What happens in the next few months here will be key for buying/holding/selling the preferred securities.

Maybe, again looking at this from a total enterprise value point of view,  especially if the management needs more time to consider “alternatives”, preferred dividends (even if much less of a cash flow drag vs CS div.), should perhaps also be suspended and put in a reserve because of  their cumulative nature. Maybe too much, but at least, it would send a message that they are in a business preservation mood and not a business as usual mood. “Over-reaction” on the safe side is OK.

Within the next few hours/days, I will send a letter, similar to what others have done, to investor relations stating my positions in preferred stock and my opinion versus the common share dividend.

In the last years, share repurchase was significant as money was coming through their ears and the institutional bias was definitely present but the average price paid for the years 2008-2016 was 12.19$ per share. Food for thought. I cannot come up with a reasonable range of value for the common shares at this point and that’s one of the reasons why I’m invested in the preferreds but I think that zero is clearly in the range of value for the shares. Buyer beware.

One way to evaluate a scenario where the CDN coalition would simply become an ordinary CDN coalition program without a core airline partner and to come up with residual cash flows (also valuation) implies to look at Nectar UK. On this board, some have estimated the “hit” that could would occur to cash flows after 2020, ie historical cash flows minus adjustments. I will analyze this from a slightly different angle: given the competitive landscape in Canada and the numbers that the EMEA (mostly Nectar UK) unit produced over the years, what could be expected in terms of gross billings and margins for the residual CDN entity? The UK and Canada are comparable mature markets for loyalty programs. There are differences but, like in Canada, Aimia competes with the Air Miles program (now Avios, as a sub of British Airways) and other loyalty programs in the UK. Nectar UK did not have a core airline partner initially and still does not have a true “anchor” airline partner. Nectar UK has been able to enter the loyalty segment convincingly in 2002, but that was before Aimia. To look at this, I tabulated the gross billings and adjusted EBITDA numbers for the EMEA division from 2008 to 2016. The EMEA division also includes Air Miles Middle East and other smaller operations but, mostly, revenues and cash flows have been derived from Nectar UK. Numbers need to be dissected because, during those years, there was an adverse VAT judgement (legacy issue) and then recovery after reversal. Interesting to remember that Aimia paid 715,4 millions for LMG (Nectar UK, Air miles ME and analytics sub) in 2008. Since 2008, despite a very competitive and mature market, Aimia has been able to grow active members ++ and to grow gross billings + (variable). But there has been quite a high turnover of retail members. The average annual adjusted EBITDA over the 9 year-period is 47,3 millions. Over the last 3 years, the average annual adjusted EBITDA is 68,5 millions. The average adjusted EBTDA margin for the last 3 years is 11,0%.

References for Nectar UK:
https://www.forbes.com/sites/mckinsey/2014/02/03/making-loyalty-pay-six-lessons-from-the-innovators/#6b639b9a2bda
https://www.forbes.com/sites/mckinsey/2014/02/03/making-loyalty-pay-six-lessons-from-the-innovators/#6b639b9a2bda

So, taking into account the competitive landscape for loyalty programs in Canada, the number of active users in Canada for Aeroplan, the reported numbers that can be inferred from the EMEA division that corresponds to Nectar UK as a “generic” coalition program and the negative impact that can be expected from AC leaving the Aeroplan Program, I estimate that gross billings AND adjusted EBITDA margin could be roughly cut in half for the new CDN Aeroplan, giving rise to a +/- 75% net decrease in adjusted EBITDA. This scenario is more adverse than what some analysts describe and may be explained by an underlying assumption that conditions otherwise remain static, which, as mentioned above, is unlikely to be the case. However, in this adverse scenario, there is no value left for common shares and preferred, being next in line, become threatened, at least partially.

However, on balance, long term cash flow analysis allows me to conclude that the actual capital structure and potential cash flow possibilities going forward creates a reasonable profit opportunity for the preferreds.

Topic #5: Possible upside

Many things can go wrong here and RISKS abound but, if I put myself in the position of a private equity player, I see value here. Yes, Onex was interested before and presumably, presently, may look at the opportunity. PE people are usually good at value resurfacing, especially short term, but they are also good at value extraction. One more reason for the preferreds over the common at present price levels and outlook.

Somehow, Air Miles could buy part or all of Aimia even if AC is out of the picture. Buying your closest competitor can be a good idea. I don’t think there would be regulatory issues.

Conclusion

I plan to be pro-active with investor relations, and maybe will eventually send letters directly to the Board, if I continue to hold the preferreds and if I find that management lacks prudence and vision.

So, I see this as value contrarian play and a reasonable opportunity for profit. Please, if you made it this far, try to disrupt (rational basis) my assumptions.

Title: Re: TSX:AIM - Aimia
Post by: Cigarbutt on June 09, 2017, 01:44:09 PM
So the CFO is going.

My take is that this is a net negative. Despite often used as a pretext, I buy, at least partly, the personal reasons excuse.
A related positive is that this may inject some sense of relative urgency.

I happened to be in downtown Montreal today. Dropped by Aimia’s headquarters and left a letter to investor relations and one to Mr. Robert Brown, Chairman.

----

To: Investor Relations, Karen Keyes
Hi,

I have followed Aimia for a long time and I am holding, directly and indirectly, a significant amount of Aimia preferred shares (A,B and C).

The aim of this letter is to share concern for the enterprise value of Aimia going forward. This concern is now compounded by the recent CFO departure announcement. Please share the concerns contained in this letter with top management.

Last October 2016, the then CEO, Mr. Duchesne stated the following, referring to the negotiation for renewal with Air Canada: “So I think the stage is well-set. When they're ready and when we're ready we'll get into a negotiation. But I think the prospect of a divorce would be so horrible for both parties that we'll actually get to a fairly straightforward deal.” 

So now, there is a question of “alternatives” and new management has referred to business as usual conditions but clearly the core of Aimia is threatened and the margin of safety is gone.

From a total enterprise value point of view, management should strongly consider options in order to avoid going concern issues. The first obvious step is to completely eliminate the common share dividend going forward. As an investor in the company, I submit that, in order to save the company, a joint partnership should be considered with Air Canada for the Canadian Aeroplan loyalty program. The partnership could be modeled on the arrangement with AeroMexico. This could bring Air Canada back to the negotiating table and could maintain the value implicit in the contracts with the major credit card issuers.

Whatever scenarios considered, I suggest that management define a vision and communicate, in a transparent way, the strategic plan to get through this difficult transition period.

As a private investor, I will follow the evolution of this situation very closely.

Thank you for your attention,

----

June 9th, 2017
Tour Aimia
525 Viger Avenue West, Suite 1000
Montreal, Quebec H2Z 0B2
Canada
To: Mr. Robert Brown, Chairman of Aimia’s Board

Mr. Brown,

I have followed Aimia for a long time and I am holding, directly and indirectly, a significant amount of Aimia preferred shares (A,B and C).

I also have followed your business career over the years. I trust that, as Aimia’s Chairman of the Board, you will use business acumen and strategic vision skills that you were able to deploy when developing regional jets or leading CAE, as Aimia is entering turbulent times. Your record shows that you can guide difficult restructurings and I commend you for that.

Today, I personally brought this letter to Montreal Headquarters and include a copy of another letter sent to the Investor Relations department. I understand that the management team may be “ready” and perhaps needs to “take a breath” before the next steps but I submit that a transparent process needs to be put in place in order to avoid erosion of Aimia’s value as a loyalty program manager. This business is based on trust.

Financial flexibility will only be preserved on strength of the balance sheet.

I understand that Air Canada’s announcement was brutal but the best scenarios imply some kind of a “win-win” solution with them even if the terms are less favorable to Aimia.

I understand also that Mr. Tor Lonnum is leaving for personal reasons. A review of what he has achieved at Tryg makes me conclude that this is a significant loss occurring at a difficult juncture for Aimia.

When you won an honorary degree at Concordia in 2003, the citation referred to your military training as a cadet and mentioned the following: “Throughout his career, Robert Brown has inspired many with his intense work ethic and talent for getting things accomplished quickly and effectively.” I submit that is the right template for Aimia right now.

As a private investor, I will follow the evolution of this situation very closely.

Thank you for your attention,
Avec respect,

----

So, it’s wait and see for now.
Title: Re: TSX:AIM - Aimia
Post by: Cigarbutt on June 14, 2017, 05:40:54 AM
News release.
http://www.newswire.ca/news-releases/aimia-provides-update-on-dividends-628376883.html

I guess the reality is starting to sink in.
So, the prospect of "going through a divorce" is no longer a prospect.
Likely, they were not entirely "ready".

If I were from top management, I would cancel my summer vacation.

Enjoy the ride?

Title: Re: TSX:AIM - Aimia
Post by: Cardboard on June 14, 2017, 06:08:17 AM
Truly a stupid bunch. Instead of attacking the issue head on and saying: we are cancelling the dividend to save cash and protect for any eventuality since our business future is uncertain at the moment, they are relying on a CBCA clause to justify it...

Or they are trying to protect themselves from some directors liability since they made really misleading statements with the Q1 release: still in negotiation with AC, plenty of options, improper financial statements without appropriate write-offs? Or it is a way/combination with the above to claw-back on already declared dividends?

Regarding not paying the obligation to the preferreds that is another bad decision. It saves $16.8 million/year while the common dividend is $122 million/year. Again, the dividend on the preferred is an obligation, not some discretionary payment like for the common and to cut this either shows desperation or that they want to treat both classes of security equally which is wrong.

Cardboard
Title: Re: TSX:AIM - Aimia
Post by: clutch on June 14, 2017, 07:00:33 AM
Truly a stupid bunch.

That is an understatement...
Title: Re: TSX:AIM - Aimia
Post by: samaniv on June 14, 2017, 07:17:40 AM
I think, as we've seen from prior analysis - that the financial impact of losing classic fares isnt the end of the world.

It really boils down to Aimia ability to attract a new partner and provide value to customers, so that they will continue using their loyalty program. I am hoping that we get an announcement of a new partner (perhaps Sunwing? or cruise ships etc). sooner rather than later. Otherwise they risk losing customers in a mean time.

In terms of cutting the dividend, I think it was a good decision. Of course, I would have liked to see the preferred dividend maintained. At least it is cumulative, so as long as Aimia is able to secure a new partner - they will be okay. Given their buying power, I am not sure why they haven't already.

Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on June 14, 2017, 07:18:04 AM
Folks, with all due respect, I have to disagree.  And I own some pref shares so I'm feeling the mark to market pain today (which could be temporary as there are always yield-hogs in these situations that care about nothing else.  and maybe some funds that can't own anything that doesn't produce income).

Several voices on this thread - including my own - have advocated for a suspension of dividends.  Well, we got it.  Who cares what reasons mgmt gives for this move?  They mentioned the decision by Air Canada and probably threw in the other stuff to avoid the appearance of desperation, which was smart.  Imagine if the Canadian news were suddenly filled with stories of "financial troubles" at Aimia - if that were to happen, perception could become reality as Aeroplan members might think they need to redeem miles now before the company runs out of cash to pay for flights.

And if it makes sense to suspend the common dividend, it also makes sense to suspend the pref dividends.  (Again, I own prefs.)  We've always known that the company has the right to do this, and since these dividends are cumulative it should be clear that Aimia isn't/can't do this to cheat us out of anything.

Nothing in the press release suggests that the company is no longer in discussions with Air Canada or that any partnering options have disappeared. 
Title: Re: TSX:AIM - Aimia
Post by: samaniv on June 14, 2017, 07:35:30 AM
Misterkrusty,

When are you hoping to hear something re: potential new partners? I figure they should be able to sign on new partners fairly easily...  but I understand they wouldn't want to rush into something so it may take some time.

I guess part of me is fearful they will not secure a partner before they lose a lot of customers. That would be worst case in my mind.
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on June 14, 2017, 08:00:57 AM
honestly I just don't know when we'll hear about new partners, or a new deal with Air Canada (but obviously not for their FFP). 

I agree with you that they should be seeing decent interest from airlines given their buying power.  It's only been ~33 days since AC dropped the bomb and that's not really a long time in terms of negotiations like this, especially since they're probably talking to multiple parties regarding some of the same routes (for flights) and would tend to get a better price by concentrating their buying power.
Title: Re: TSX:AIM - Aimia
Post by: petec on June 14, 2017, 08:52:13 AM
A couple of thoughts:

1) If the CBCA thing is true it may mean they can't pay the preferred dividend, rather than that they chose not to.   Remember it is a dividend, not an interest payment, so it may be regulated the same way as a common dividend.

2) Worst case there has already been a major "run on the bank", triggering the capital breach.   However their commentary around the CBCA breach makes it sound like the capital breach has to do with market cap and shareholder equity line items on the balance sheet, not cash flows.   In fact, they say the business continues to generate free cash flow.

3) It's worth remembering that in a breakup of the business preferred holders will get back $25 plus accrued dividends before common shareholders get a cent.   My guess is that a breakup is getting more likely (I have little evidence for this but the wholesale flight of execs and directors makes me wonder).   

EDIT: I'd also speculate that at the right price, which might not have to be very high for the prefs to be money good (the EV of the business is now $700m with the prefs at par), AC might buy Aeroplan.
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on June 14, 2017, 09:01:44 AM
I think the CBCA thing is a bunch of nonsense thrown in so that folks don't get the impression that this decision was forced upon them by trends in the business.  If it were true, I don't think they would ever have declared the last dividend.

for what it's worth, this doesn't suggest any rush to redeem points:  https://www.semrush.com/info/aeroplan.com   but I'm no expert on web traffic, so correct me if wrong!
Title: Re: TSX:AIM - Aimia
Post by: screefer on June 14, 2017, 09:19:58 AM
If it were true, I don't think they would ever have declared the last dividend.

Most recent dividend was declared before the share price was shredded with the Air Canada news.
After the AC news, the SP dropped and the capital impairment clause came into play.
Makes sense to me.
Title: Re: TSX:AIM - Aimia
Post by: petec on June 14, 2017, 09:21:24 AM
I think the CBCA thing is a bunch of nonsense thrown in so that folks don't get the impression that this decision was forced upon them by trends in the business.  If it were true, I don't think they would ever have declared the last dividend.


The release says they are compliant with CBCA clause 42(a) but not compliant with 42 (b) due to the decline in the market cap and the high value of the capital account due to the issue of shares at higher prices.   The clauses are below.   What they are saying is the value of the business is now lower than the liabilities plus the stated capital of all classes.   And they're almost certainly right about that!   That wasn't the case when they last declared a dividend (May 10th) because the market cap was higher.   So this doesn't have to be an excuse.   It is, however, very positive for pref holders: they should have stopped the common dividend immediately and stopping it transfers a lot of value back to pref holders.   

The clauses:

42 A corporation shall not declare or pay a dividend if there are reasonable grounds for believing that

(a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due; or

(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes.

EDIT: it occurs to me that even if there is wiggle room under 42(b), it might be possible for pref and debtholders to sue them under this clause if they keep paying the common dividend.   They might even have had this called to their attention by a debtholder.   
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on June 14, 2017, 10:00:03 AM
Not quite what we expected.  Funny enough I sold some of my a's a couple of days ago, at a decent gain. 

After my initial reaction of wanting to sell right away (I only have the prefs) I settled down and started thinking that this looks like a buying opportunity.  Not sure I have the guts to pull the trigger. 

The COB, CEO, and CFO are in place (CFO for four months).  They have enough cash flow ex. Aeroplan to resume the Pref. dividend, and catch it up. 

They have bought alot of time to stabilize the brand.  We can only hope they have the ability to do it. 

Regarding Ac making a bid.  I dont think AC can do it.  They would get their asses sued into another dimension for torpedoing the stock and trying a stunt like that.  Now aother airline could.  In fact any airline that might be interested in taking up a bigger presence in Canada, say a Mexican or US airline. 
Title: Re: TSX:AIM - Aimia
Post by: petec on June 14, 2017, 11:40:12 PM
I'm not suggesting AC make a bid for Aimia.   I'm suggesting they could buy the Aeroplan unit (effectively the existing points base).   However that might well still leave them vulnerable legally - I don't know.   Maybe not if it was at a demonstrably fair price.   But you are right, far more likely someone else buys it.   There must be activist value guys looking at this.
Title: Re: TSX:AIM - Aimia
Post by: petec on June 14, 2017, 11:42:50 PM
Separately: if they take a writeoff on Aeroplan, does that reduce "the stated capital of all classes" or does it just reduce retained earnings?   In other words, would a writedown allow a resumption of pref dividends?

EDIT: I may be being thick but I can't actually see where on the FS shareholder equity is broken into its constituent parts (e.g. in the US you have common stock at par, value above par, retained earnings, etc.).   Does Canadian accounting require this split?   
Title: Re: TSX:AIM - Aimia
Post by: gokou3 on June 15, 2017, 12:22:45 AM
Sucks to be a shareholder today.  Free cash flow for 2016 was ~$200M.  Assuming things stay as-is until the AC agreement terminates (i.e no new partner, no merger / buyout / activist, etc), Aimia will need to use all of its cash flow and more in the next 2 years to pay off its debts maturing in Jan. 2018 ($200M) and May 2019 ($250M).  Any hope of the company aggressively buying back the common/preferred shares would be too optimistic, agree?
Title: Re: TSX:AIM - Aimia
Post by: writser on June 15, 2017, 01:20:19 AM
I spent a few minutes looking at this and it looks to me as if they got paid cash for points, paid out that cash to shareholders and are left with the liabilities. What happens if their business shrinks the next few years (suppose they don't find a good alternative for the AC plan) and people start to spend points instead of save them? Seems to me as if a 'point run' could easily bankrupt the company. Wrong way to look at things? I see a lot of talk about being able to pay off debt but deferred revenue is a much larger liability and if I understand correctly they already account for 12% leakage. What do you guys think is the intrinsic liability (and what are the cash requirements) of the issued points in several scenarios? Or should I take the Warren Buffett approach and see it as a 3b asset?!

Any insights / primers would be appreciated. I'm a bit out of my depth here.
Title: Re: TSX:AIM - Aimia
Post by: screefer on June 15, 2017, 06:04:55 AM
From PrefBlog
http://prefblog.com/?p=35002 (http://prefblog.com/?p=35002)

"As far as the stated reason for suspending dividends is concerned, well, having $2-billion goodwill on the balance sheet vs. $115-million of shareholders’ equity doesn’t help matters much, and neither does a Retained Earnings (Deficit) balance of $2.7-billion. I’ll need a little convincing before I believe that “past common share issuances at significantly higher prices than the current market” has anything to do with. Looks more like the company has simply pissed away its capital."
Title: Re: TSX:AIM - Aimia
Post by: roark33 on June 15, 2017, 09:29:07 AM
Seems like the longs, people here and on VIC are under-estimating the risks:

1. Top of the wallet to bottom of the wallet.  No new float coming in is not a good situation for AIM.  If people stop using their Aeroplan cards, you basically have a situation where all the benefits of a float are reversed.

2. Liabilities pulled forward.  Even if people know they have three years to use their rewards, they may begin to use them much faster.

3. Why would WestJet partner?  Even though Aimia has lots of purchasing power, they need to have a lot of unused capacity to make it worth their time and money to partner with Aimia to sell this capacity at a discount to market. 

If they sign a new deal in the near future, this could work out ok, but it seems like there are some catastrophic risks not being taken into account here.  (but the stock does seem to be taking these risk into account).
Title: Re: TSX:AIM - Aimia
Post by: Foreign Tuffett on June 15, 2017, 09:53:28 AM
I spent a few minutes looking at this and it looks to me as if they got paid cash for points, paid out that cash to shareholders and are left with the liabilities. What happens if their business shrinks the next few years (suppose they don't find a good alternative for the AC plan) and people start to spend points instead of save them? Seems to me as if a 'point run' could easily bankrupt the company. Wrong way to look at things? I see a lot of talk about being able to pay off debt but deferred revenue is a much larger liability and if I understand correctly they already account for 12% leakage. What do you guys think is the intrinsic liability (and what are the cash requirements) of the issued points in several scenarios? Or should I take the Warren Buffett approach and see it as a 3b asset?!

Any insights / primers would be appreciated. I'm a bit out of my depth here.

I was looking at this last week and saw some of the same things. The equity could be a zero if members accelerate point redemptions before the Air Canada agreement expires. I think to invest in this you have to trust that management will make moves to enhance the program's value proposition to consumers. I don't see any reasons to trust this management team, so I'm staying away.
Title: Re: TSX:AIM - Aimia
Post by: longlake95 on June 15, 2017, 10:05:43 AM
Gee what a mess. For me, my simple filter: "would I buy the whole business and keep present management?" has keep me out of the this name. Doubt WJ will partner with Aima, they already have a points program and partner with RBC for credit cards that earn points.
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on June 15, 2017, 10:10:47 AM
gokou -  the 2018 notes have been refi'd using the credit facility, which matures mid-2020.  so depending on spending patterns with Aeroplan credit cards, they might have cash to do buybacks, but probably won't consider doing so until new airline partners are secured.

writser - in a worst case scenario, Aeroplan can re-write the redemption rules at will.  of course this could seriously damage the Aeroplan brand, so it's only a last-ditch solution.

roark/longlake - every airline has unused capacity.  filling up those last unfilled seats brings huge incremental margins.  I have little doubt WestJet could find a way to work with Aeroplan, and it doesn't have to involve their FFP.  Sure, they already have a credit card partnership with RBC ... so what?  As long is it isn't exclusive, why wouldn't you bring in more revenue?  Also, keep in mind that Aeroplan isn't limited to partnering with just one airline.

It all boils down to lining up attractive new flight options for Aeroplan post June 2020, and doing so quickly such that members don't stop spending on their Aeroplan credit cards. 

I have no position in the equity but do still own some preferreds.  If the 2019 notes ever trade back to ~80 they might be interesting too.
Title: Re: TSX:AIM - Aimia
Post by: petec on June 15, 2017, 10:24:22 AM
I'd add that if Aeroplan has a run on the bank it's probably done, but it should be in a separate legal entity that can be allowed to die and the other assets have a good chance of covering the value of the prefs.
Title: Re: TSX:AIM - Aimia
Post by: writser on June 15, 2017, 11:08:39 AM
I'd add that if Aeroplan has a run on the bank it's probably done, but it should be in a separate legal entity that can be allowed to die and the other assets have a good chance of covering the value of the prefs.

Yeah, I was wondering about that. What's the legal status of loyalty points? Are they senior to equity? Preferred equity? Maybe technically not but I have a hard time believing that they can impair / rewrite their loyalty programs while the equity still has significant value. At the very least there would be a huge backlash. Interesting stuff.

Looks to me as if Aimia is in a bit of a pickle. They desperately need cash to keep the machine running but with all the bad news partners drop out, customers will redeem points so they need even more cash - rinse and repeat. Hard for me to judge whether Aimia can survive that in the short term - I have no clue how customers will react and what the resulting cash flows will be (if everybody was like me they'd be bankrupt already). Also I have absolutely no clue about the chances of them striking another airline contract. Situation seems dire and management seems incompetent - not a good negotiation position. This name is too difficult for me but I see the upside potential.

Has anybody actually tried modelling some scenarios?
Title: Re: TSX:AIM - Aimia
Post by: screefer on June 15, 2017, 12:28:48 PM
Has anybody actually tried modelling some scenarios?
FWIW...

https://seekingalpha.com/article/4078021-aimia-offers-deep-value-investors-high-risk-tolerance (https://seekingalpha.com/article/4078021-aimia-offers-deep-value-investors-high-risk-tolerance)
https://seekingalpha.com/article/4081743-aimia-deferred-revenue-redemption-threat-manageable (https://seekingalpha.com/article/4081743-aimia-deferred-revenue-redemption-threat-manageable)
Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on June 15, 2017, 03:59:53 PM
writser-  I agree the situation could be dire.  but we just don't know what redemption & accumulation trends are. 

traffic to the aeroplan site doesn't appear to be spiking:  https://www.semrush.com/info/www5.aeroplan.com   but frankly I'm not that worried about a rush to redeem with 3 years left on the contract.  more concerning to me is accumulation trends - mainly the level of spending on Aeroplan credit cards.  and that's why the CFO and board member departures worry me.

I would think that in the worst case scenario they gate redemptions, leaving enough value in the cash & equivalents plus businesses outside of north america ($88m combined ebitda in 2016) that the debt is money good with enough left over to cover at least the current $94.5m market cap of the preferreds.  how much better than that I don't really know.  The equity would be toast.

but I'm not a big believer in the WCS.  I don't see why - if nothing else - they couldn't just strike a deal with Air Canada to buy all their flights at Market Fare rates, which would be an incremental ~$60m/year at 2016 levels of member activity.  Loss of Air Canada FFP is maybe about an $80m hit to EBITDA.  But then there's apparently $70m of cost savings.

Just to make a point, I'll assume for a moment that accumulation & redemption patterns stay around 2016 levels, which equates to ~$220m FCF.

$220
-80
-60
+70
=150

my point here is that Aeroplan could get a lot less popular and there would still be enough FCF to cover the $17m of preferred dividends and pay off the debt when it matures.  Also probably enough left for the equity to support the current $225m market cap - but as for upside on the stock, I'll leave it to y'all to run your own numbers.





Title: Re: TSX:AIM - Aimia
Post by: misterkrusty on June 15, 2017, 04:09:17 PM
also, I disagree that management seems incompetent.  They could be, but I don't think we've seen any evidence.

We don't know what went on in negotiations with Air Canada, so it's way too early to blame them for AC's decision.  Frankly, I suspect that decision had to do mainly with events beyond Aimia's control - namely the recent entry of WestJet into the business class market (see my earlier post).

Suspending dividends was a prudent move - I gotta admit that even though I own some pref shares.

Mgmt has stated in at least a couple press articles that finding new reward partners is their top priority, as it should be.  They've also said they're keeping close tabs on redemption & accumulation trends, as they should. 

Lastly, while we don't know what's the real reason those directors are leaving, I frankly would have cut the board down to 9 people if I ran the show.  what board needs more than 9 members?  you save money and make faster decisions.
Title: Re: TSX:AIM - Aimia
Post by: Cigarbutt on June 15, 2017, 06:57:58 PM
Several good points.

In these cases, it often gets worse before it gets better. The reason why this is an opportunity is that there is a clear risk for a downward spiral.

Somehow holding the preferreds here feels like being scheduled for a vasectomy. You thought about it, you know it is probably the right decision, you assume that people know what they are doing and you expect some pain but you could always cancel the appointment.

Keeping an open mind here. I think they did the right thing by rapidly and completely cutting the dividends (technical rule or not). This feels uncomfortable but the context may bring a catalyst for improvement earlier. Added some more.

-On their cash flow business model, downside and upside

Over the years, they have produced free cash flows that were used essentially to pay dividends and buy back shares causing the accumulation of retained earnings deficiency. BTW petec, you may find what you are looking for on p112/189 of the 2016 AR, Consolidated statements of changes in equity. Retained earnings = (2,74 billion). The GW of Aeroplan is 1,68 billion and 85% of GW for all of Aimia. Without AC, the trend is clearly unsustainable whichever way you look at it. The run issue is important but I don't think that this is a problem now. The risk is that once a run starts with the redeemers, things could go downhill very rapidly.

Looking at different scenarios and comparing to the recent links from seeking alpha, I still think that there is some margin of safety for the preferreds if Aimia has to integrate less profitable alternatives.

My opinion is that Aimia allowed itself to be vulnerable. I still think that they can recover value by somehow negotiating a new deal with Air Canada and preserving the inherent value in Aeroplan. Looking at this from the outside, I assume that they are trying to build negotiating leverage with AC (with alternatives). They have to balance the positive of building that leverage versus the negative of value erosion of the brand as time passes by. Given the relative precarity of the situation, I would tend to say that they have to act rapidly even if that means a better deal for AC. I recognize that we have to rely on management and this is hard to assess.

Title: Re: TSX:AIM - Aimia
Post by: clutch on June 15, 2017, 07:13:55 PM
Just looking at this from a high level perspective, I wonder if the commons is now a better bet?
So the price has dropped 30% since the news of the dividend cut. Wasn't the market expecting this already for the commons (in contrast to preferreds)? In fact, many here wanted the company to do this. So, it seems like a major panic move by many investors.
Maybe i'm being too simplistic...
Title: Re: TSX:AIM - Aimia
Post by: petec on June 16, 2017, 04:26:02 AM
Just looking at this from a high level perspective, I wonder if the commons is now a better bet?
So the price has dropped 30% since the news of the dividend cut. Wasn't the market expecting this already for the commons (in contrast to preferreds)? In fact, many here wanted the company to do this. So, it seems like a major panic move by many investors.
Maybe i'm being too simplistic...

The dividend cut is a major transfer of wealth from common to pref: they will now get the cash in the business before the common shareholders do, which was not the case before.   The prefs will double to get back to where they were before if things go OK, and could treble to par if things go great or if the company is broken up, plus they accumulate their dividend (the commons don't).   There is a decent probability they are not a zero, but they probably need to be worth much more than the current price before the commons are worth a cent.   Prefs all the way for me.
Title: Re: TSX:AIM - Aimia
Post by: Cigarbutt on June 16, 2017, 05:11:16 AM
I have considered the common as well.
This is not an investment that you buy and don't have to worry about for years.

When looking at these "distressed" cases, I try to remember what Mr. Buffett said during a Berkshire Shareholder meeting:

"Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect but that’s what it’s all about.”

My humble way to see it:

For Aimia preferreds, the most likely returns lie between -50% and +100%, with a positive skew.
For Aimia common shares, the most likely returns lie between -75% and a four-bagger, with a negative skew.

I hope to continue to do well over time with these basket cases but there is no guarantee.
This is a grey zone but I submit committing capital in the common instead of preferreds here marks the difference between investment and speculation.
Title: Re: TSX:AIM - Aimia
Post by: samaniv on June 18, 2017, 08:46:43 AM
I agree that there are several consumer related trends ( run on the points , usage etc.) and it's hard for us to determine how consumers are reacting. I'm sure if everyone was watching the market closely , they would redeem points , decrease usage etc. But the fact is a lot of these people are everyday individuals and even with the news coverage, they might have missed it or misunderstood it.

I asked some of my friends ( I am Canadian ) who use Aeroplan points and they seemed pretty clueless. They heard something about it in the news but didn't think much of it. It didn't seem like big shifts but it's hard to extrapolate this and know what is happening with the masses.

Another point is you can simply line up and withdraw your points like a bank run. To redeem points you need time off for a vacation , planning etc. which mitigate the redemption risk to some extent. If I had to guess , I would say most people aren't following this as closely and taking big actions on it - probably instead a more wait and see approach - but again it's a guess - k don't know.

Title: Re: TSX:AIM - Aimia
Post by: Uccmal on June 21, 2017, 06:05:30 PM
I am out.  Took a loss, not too severe after accounting for dividends. 

I simply dont trust this situation.  Even if it recovers somehow, in a rising interest rate environment, the prefs wont get much above where they were a few weeks ago. 



Title: Re: AIM.TO - Aimia
Post by: Sergio8 on June 22, 2017, 02:23:21 AM
It seems to me that the decision to cut dividends in order to preserve liquidity is wise or at least cautious. It looks like that while deferred revenue was favorable to cash generation in the past, it may weigh negatively on the business in the future, and it is very hard to assess the extent of the impact.

If we back out deferred revenue from cash and liquid investments (probably a bit too severe as the business historically has positive margins), we get a heavily indebted business, and it would need 5 years of historical cash-flows just to pay down the debt.

Of course, should the company be able to replace its lost contract, the impact would probably be somewhat mitigated... But figuring the future remains tricky.

I am aware that I am not an expert of the situation, just trying to figure things out, and the situation looks quite compex to me (it seems to me that we can't just take historical financials and extrapolate them to figure out the cash-flows), with a levered balance sheet.

Can someone that studied this company for sometime tell me how he looks at the balance sheet issue there? Is it easy for you to be comfortable with the deferred revenue portion of the business and its debt levels when you know the business well?

Thank you in advance for your insights.
Title: Re: TSX:AIM - Aimia
Post by: petec on June 22, 2017, 07:02:24 AM
In a rising interest rate environment, the prefs wont get much above where they were a few weeks ago.

But they are (lagged) floaters!
Title: Re: AIM.TO - Aimia
Post by: misterkrusty on June 22, 2017, 07:36:47 AM
the Series B/2 preferred coupons are reset every 90 days.  a rising rate environment would be great for them.

sergio - the redemption liabilities need to be considered when calculating an EV.  but as far as liquidity issues go, they're not exactly liabilities that are due on demand.  Aeroplan can adjust the redemption rules at will (at some cost to the value of the brand), or in a worst case scenario cancel the Aeroplan program alltogether.
Title: Re: TSX:AIM - Aimia
Post by: Uccmal on June 23, 2017, 09:51:46 AM
In a rising interest rate environment, the prefs wont get much above where they were a few weeks ago.

But they are (lagged) floaters!

Yeah, my mistake.  I have too many balls in the air. 

I reread part of this thread where we (the group) go back and forth. 

Cardboard was consistent in advising people to avoid the common which was good. 

Otherwise, the thesis has changed dramatically through the course of the thread.  We started with speculation about whether they would get the renewal with AC and what those terms might be.  Now, the general theme is: Will there be a run on the bank?  Can they service their debt, especially after paying out 120 million a year for the last few years?  Did they borrow from the future?  Will they get another partner?  Will the terms with another partner be as good as with AC (not likely)? And so on.  The thesis is definitely different. 

I expect, once they get it all sorted out they will honour the cumulative on the prefs... they pretty much have to unless they go into CCAA.  But I wont be there to participate.  It is likely a farly good Graham style investment but it doesn't fit my byline which is my mission statement. 

 I have been repositioning my holdings across the board into companies that have long runways, consistent earnings, and consistently raise their dividends.  In the long run it will work. 
Title: Re: AIM.TO - Aimia
Post by: kab60 on June 23, 2017, 11:06:41 AM
I'm also out. I picked the pref because I thought it would do okay without an extension and it actually did after the indiscriminate selling. That's when I should've sold, but I sucked my thump and have taken a 30 pct. loss instead of 10 pct. after divys. I think it was a good and assymetric bet, but now it's a different case, and I can't really figure out the odds other than the common looks more attractive now. I knew from the start that I knew too little about this business, so here's to sticking to simple stuff, preferbly with a boooring name.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 04, 2017, 08:32:28 AM
More perspective on potential options and outcomes.
Here's a link with comments at the end.
One comment refers to an article about Westjet (from a few years ago).

 https://seekingalpha.com/article/4085113-aimia-preferreds-foresight-20-20?page=3
 https://www.theglobeandmail.com/globe-investor/westjet-takes-aim-at-aeroplan/article4316401/
Title: Re: AIM.TO - Aimia
Post by: petec on August 10, 2017, 08:37:24 AM
No sign of a run on the bank so far.
Title: Re: AIM.TO - Aimia
Post by: Saj on August 10, 2017, 04:11:52 PM
Agreed. Very positive report today. Now just need mgmt to execute by replacing AC with something reasonable over the next year or two.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 10, 2017, 04:57:28 PM
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?
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on August 10, 2017, 06:03:26 PM
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
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 25, 2017, 08:29:54 AM
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.
Title: Re: AIM.TO - Aimia
Post by: petec on August 29, 2017, 06:48:01 AM
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.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 29, 2017, 05:15:53 PM
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.
Title: Re: AIM.TO - Aimia
Post by: petec on August 31, 2017, 01:18:05 AM
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?
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 31, 2017, 03:48:35 AM
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?
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on September 01, 2017, 08:30:48 AM
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.
Title: Re: AIM.TO - Aimia
Post by: petec on September 01, 2017, 08:46:55 AM
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)!
Title: Re: AIM.TO - Aimia
Post by: petec on September 01, 2017, 08:53:32 AM
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.   
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on September 06, 2017, 04:37:16 PM
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.
Title: Re: AIM.TO - Aimia
Post by: petec on September 07, 2017, 01:52:20 AM
Thanks Cigarbutt!
Title: Re: AIM.TO - Aimia
Post by: NewbieD on September 08, 2017, 07:32:06 AM
Is there any difference to dividend rights in the A, B, C prefs?
Title: Re: AIM.TO - Aimia
Post by: Uccmal on September 18, 2017, 08:37:39 AM
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. 
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on September 30, 2017, 06:32:40 AM
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.
Title: Re: AIM.TO - Aimia
Post by: petec on October 10, 2017, 05:33:30 AM
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.
Title: Re: AIM.TO - Aimia
Post by: petec on October 10, 2017, 05:38:09 AM

-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.
Title: Re: AIM.TO - Aimia
Post by: kab60 on October 10, 2017, 08:12:54 AM

-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.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on October 10, 2017, 11:15:00 AM
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.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on November 03, 2017, 07:00:01 AM
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.
Title: Re: AIM.TO - Aimia
Post by: Uccmal on November 03, 2017, 09:58:03 AM
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. 
Title: Re: AIM.TO - Aimia
Post by: petec on November 09, 2017, 01:35:27 AM
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?
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on November 09, 2017, 05:12:04 AM
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.
Title: Re: AIM.TO - Aimia
Post by: sculpin on November 10, 2017, 09:34:38 AM

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.

Title: Re: AIM.TO - Aimia
Post by: Picasso on November 10, 2017, 11:22:27 AM
I hate this stock so much. 

He ignores the preferred in his debt calculation that's sitting ahead of him and trading at half of par (for a reason).  It's disingenuous to say this is a 'net cash' business.

I think that if you look at the history of any loyalty program that goes kaput, first some small number redeems right away.  But most consumers are halfway through their next hurdle rate to get the actual reward (in this case flight) that they want to earn before the program goes away.  So they keep spending for a bit before switching cards.  I don't see how looking at the recent quarterly results and saying this thing is going back to up $19 makes any sense.  The outcome here is not linear in that way at all.  Redemption's will accelerate before the deadline if they can't strike a deal on par with the Air Canada.  I could go on about this for hours but I'd rather not pop a blood vessel before the weekend.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on November 10, 2017, 12:22:35 PM
There is enough to hate in this world.
A stock does not know if you own it or not.
Anyways, if markets are efficient, the value in preferreds should eventually be recognized. ;)
But this is puzzling.
Maybe not related but, in the noise, some say that Aimia will integrate blockchain opportunities.
Exciting?
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on November 10, 2017, 05:47:10 PM
I only get excited if they are doing marijuana and blockchain and lithium mining.

Title: Re: AIM.TO - Aimia
Post by: NewbieD on November 12, 2017, 08:10:28 AM
Seems likely that a virtuous circle will develop...Something like

Higher stock price -> higher likelihood of passing capital impairment test -> expectation of preferred dividends -> higher preferred and common stock price -> pass capital impairment test -> preferred dividends -> perceived financial health -> higher stock price

Agree with Picasso redemption development is not likely to be linear. But I also Believe a decent portion are not that into the program and will never redeem. Anyhow, I think such a development would be >1 year from now, giving the above development some time to play out.

Title: Re: AIM.TO - Aimia
Post by: writser on November 12, 2017, 08:29:23 AM
I hate this stock so much. 

He ignores the preferred in his debt calculation that's sitting ahead of him and trading at half of par (for a reason).  It's disingenuous to say this is a 'net cash' business.

I think that if you look at the history of any loyalty program that goes kaput, first some small number redeems right away.  But most consumers are halfway through their next hurdle rate to get the actual reward (in this case flight) that they want to earn before the program goes away.  So they keep spending for a bit before switching cards.  I don't see how looking at the recent quarterly results and saying this thing is going back to up $19 makes any sense.  The outcome here is not linear in that way at all.  Redemption's will accelerate before the deadline if they can't strike a deal on par with the Air Canada.  I could go on about this for hours but I'd rather not pop a blood vessel before the weekend.

Well said. That blogpost is either intentionally misleading or extremely sloppy. Don’t get suckered into something complicated just because you fear you might be missing the next 10-bagger “cheapest no-brainer stock pick in the universe”.
Title: Re: AIM.TO - Aimia
Post by: elc13 on December 28, 2017, 04:29:16 PM
Picasso (and any others) -- do you have any historical examples of loyalty programs going kaput as you described? Came across this company recently and doing preliminary research. Thanks to all for the informative discussion so far!
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on January 07, 2018, 07:23:44 AM
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.

Uccmal - would you mind clarifying this for me?  If i am understanding correctly, your experience did not touch on Aeroplan at all?  In other words, you did not have a TD Aeroplan card that got switched to the TD rewards program, correct? 

I am assuming that the banks can't just pull people out of the Aeroplan program and into another program whenever they feel like.  seems like that would be a bit crazy for consumers.

thanks for clarifying.
Title: Re: AIM.TO - Aimia
Post by: clutch on January 07, 2018, 07:48:06 AM
Slightly related to above...

I have Amex Gold, which I was mainly using it to collect Aeroplan points (by converting them from Amex points) and redeem for flights. This used to be a very good value, as for certain purchases I was getting at least 4% back - 2 Amex points (and hence 2 Aeroplan points) for each $1 purchase, and assuming $0.02 / miles for redeeming long-haul flights within North America.

Now I'm going to cancel it, because without Aeroplan's deal with Air Canada, I cannot get that much value neither through Amex rewards program nor other redemption purchases on Aeroplan. And I'm going to tell Amex the reason for cancelling is exactly because of Aeroplan's fallout with Air Canada.

I don't know how many people like me out there but it can't be good for Aimia when they are negotiating deals with credit card providers.
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on January 07, 2018, 11:17:01 AM
Yep, in 2015 and 2016, TD, CIBC and AMEX were falling all over themselves to offer potential new customers the best introductory offer for Aeroplan credit cards (or membership rewards cards for which points tend to be converted into Aeroplan miles), even resorting to the use of expensive TV commercials.  Since last summer's announcement, I have not seen any major promotion from any of those banks to issue new Aeroplan rewards cards.

Even if TD and CIBC don't start converting people's cards away from Aeroplan, the absence of card promotions must at least hurt somewhat.  Those banks had to buy $400 or $500 worth of miles from AIM every time they issued a new CC with a 25,000 mile introductory offer.


SJ
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on January 08, 2018, 11:20:23 AM
Slightly related to above...

I have Amex Gold, which I was mainly using it to collect Aeroplan points (by converting them from Amex points) and redeem for flights. This used to be a very good value, as for certain purchases I was getting at least 4% back - 2 Amex points (and hence 2 Aeroplan points) for each $1 purchase, and assuming $0.02 / miles for redeeming long-haul flights within North America.

Now I'm going to cancel it, because without Aeroplan's deal with Air Canada, I cannot get that much value neither through Amex rewards program nor other redemption purchases on Aeroplan. And I'm going to tell Amex the reason for cancelling is exactly because of Aeroplan's fallout with Air Canada.

I don't know how many people like me out there but it can't be good for Aimia when they are negotiating deals with credit card providers.

clutch - are you saying that you have already noticed a decline in value?  the existing deal is in place through 2020, and Aeroplan will still work with Air Canada after that point - just not on classic fares.  My understanding is that post 2020 Aeroplan will be on the same terms with Air Canada as any other point system, with the exception of Air Canada's internal system.

could you clarify?  thanks
Title: Re: AIM.TO - Aimia
Post by: clutch on January 08, 2018, 12:59:46 PM
Slightly related to above...

I have Amex Gold, which I was mainly using it to collect Aeroplan points (by converting them from Amex points) and redeem for flights. This used to be a very good value, as for certain purchases I was getting at least 4% back - 2 Amex points (and hence 2 Aeroplan points) for each $1 purchase, and assuming $0.02 / miles for redeeming long-haul flights within North America.

Now I'm going to cancel it, because without Aeroplan's deal with Air Canada, I cannot get that much value neither through Amex rewards program nor other redemption purchases on Aeroplan. And I'm going to tell Amex the reason for cancelling is exactly because of Aeroplan's fallout with Air Canada.

I don't know how many people like me out there but it can't be good for Aimia when they are negotiating deals with credit card providers.

clutch - are you saying that you have already noticed a decline in value?  the existing deal is in place through 2020, and Aeroplan will still work with Air Canada after that point - just not on classic fares.  My understanding is that post 2020 Aeroplan will be on the same terms with Air Canada as any other point system, with the exception of Air Canada's internal system.

could you clarify?  thanks

Classic fares are where the values of Aeroplan points can be maximized. Market fares are usually horrible value.

No change in the values of classic fares right now, but without them after 2020, I don't see much point in collecting Aeroplan points for flight reception.
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on January 09, 2018, 02:49:29 PM
Anyone using market fares would be objectively better off getting a cash back credit card. Classic fares also have the aspirational yet achievable business class awards, which probably drive business.
Title: Re: AIM.TO - Aimia
Post by: clutch on January 09, 2018, 05:32:18 PM
Anyone using market fares would be objectively better off getting a cash back credit card. Classic fares also have the aspirational yet achievable business class awards, which probably drive business.

Yes, I preferred to redeem for business class whenever possible.
Title: Re: AIM.TO - Aimia
Post by: petec on January 10, 2018, 01:39:11 AM
Has anyone seen evidence that Aeroplan has changed redemption terms subtly to disincentivise redemptions?
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on January 10, 2018, 06:02:29 AM
Has anyone seen evidence that Aeroplan has changed redemption terms subtly to disincentivise redemptions?



Haven't seen it yet, but I would certainly advise the company to take measures to reduce its reward liability and to do it soon.  AIM needs to crank up the number of miles required for a reward flight by perhaps 30-35%  if they want to have any equity remaining in 2021.  IMO, the easiest way to do this is change the rules of the program by bumping up the mileage requirements by 10-15% on two or three occasions over the next couple of years.

I cannot discern what the company's strategy is to manage the loss of AC and the considerable reduction in revenues that this will represent.  As a former pref-holder and an Aeroplan program participant, the lack of direction is frustrating.  I sold my prefs and I'm taking three vacations to Europe in less than a year to burn my miles...


SJ
Title: Re: AIM.TO - Aimia
Post by: petec on January 10, 2018, 07:19:19 AM
Thanks.

The deferred revenue on the BS is $3.2bn but a) that includes international coalitions and b) that's the deferred revenue rather than the actual cost of redemptions. Does anyone have a decent estimate of the cash cost if all Aeroplan points were redeemed tomorrow?

EDIT: my best guess is that 79% of the deferred revenue belongs to Americas Coalitions (equal to the 9M17 revenue split), and that 70% of that is cash cost of redemptions (equal to cost of redemptions/revenues from loyalty units for Americas Coalitions). $3,200 x 79% x 70% suggests that if all points were redeemed on normal terms the cash outflow would be c. $1760m. Does that make sense?

My back of the envelope SOTP is as follows:
$675m cash and bonds +
$400m PLM stake  +
$300m other bits based on c10x adjusted ebitda for international coalitions +
$300m in FCF to 2020 =
$1.7bn gross asset value -
$550m Pension+debt -
$325m prefs at par =
$800m to cover redemptions

If that's correct then there's about $1bn of uncovered redemption liability from the perspective of a pref holder in a windup. Basically even the gross asset value doesn't quite cover the cost of a full run in the bank because these morons have paid out their float as dividend.
 
What am I missing?
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on January 10, 2018, 07:49:39 AM
Thanks.

The deferred revenue on the BS is $3.2bn but a) that includes international coalitions and b) that's the deferred revenue rather than the actual cost of redemptions. Does anyone have a decent estimate of the cash cost if all Aeroplan points were redeemed tomorrow?

EDIT: my best guess is that 79% of the deferred revenue belongs to Americas Coalitions (equal to the 9M17 revenue split), and that 70% of that is cash cost of redemptions (equal to cost of redemptions/revenues from loyalty units for Americas Coalitions). $3,200 x 79% x 70% suggests that if all points were redeemed on normal terms the cash outflow would be c. $1760m. Does that make sense?


I haven't done the math because I sold ~6 months ago.  But, my fuzzy recollection is that AIM's deal with AC includes the right to purchase a certain number of AC seats per year at a ~8% discount.  So, it would be a mistake to assume that the redemption cost will not go higher, because if everyone rushes to the exit before June 2020, it would likely exceed AIM's maximum number of seats that qualify for a discount, and for those who redeem after June 2020 there presumably will be no discount at all.  So, perhaps add another $100m to your estimate for conservatism?

On a cash-in, cash-out basis, this one will be pretty scary if people rush for the exit.


EDIT:

Not sure whether they have exactly $700m for redemptions, or whether it's a shade better.  Cash from ops has run at ~$300m/year for the past few years, but has been disappointing for the first three quarters of 2017.  You've pencilled in a total of $300m of FCF until 2020, so is that optimistic, pessimistic, or realistic (I can't really say).  Certainly an argument could be made in favour of another couple hundred million of cash from ops over that period.  But, counterbalancing that, you have to figure that their revolving credit line will not be renewed, which will chew up ~$200m.

So, yes, they have a hell of a mess on their hands.  If they de-value the miles (I have suggested a ~30% devaluation), then there's no problem remaining solvent, but I'm not sure that there's much equity left for shareholders (even the prefs could end up being a zero).



SJ
Title: Re: AIM.TO - Aimia
Post by: petec on January 10, 2018, 08:51:13 AM
Cash from ops has run at ~$300m/year for the past few years, but has been disappointing for the first three quarters of 2017.  You've pencilled in a total of $300m of FCF until 2020, so is that optimistic, pessimistic, or realistic (I can't really say).  Certainly an argument could be made in favour of another couple hundred million of cash from ops over that period. 


Yes, agreed. My thinking is that $300m total is actually an aggressive estimate if there is a run on the bank, because in that scenario you can assume that gross billings will slow. I was trying to be kind, believe it or not!

Some time ago I estimated the prefs had a decent chance of being money good even if AC cancelled. I can't find the maths for that but I don't think I captured the destructive power of a potential run. It seems to me that the potential replacement for AC has every incentive to delay signing unless it looks like there is a queue of interested parties, which I doubt there is. So I can easily imagine this going to the wire, which materially increases the odds of a run.

Also, I believe 76% of points come from 20% of customers although I have lost the source for that stat. In a best case scenario these customers accrue points because they are heavy spenders on credit cards, and don't care who they fly with. But if they are AC frequent flyers - which they probably are on the basis that to accrue that many points you need to spend a lot on cards AND pay for flights often - then Aeroplan will have a tough time preventing them from migrating to AC's internal programme. That possibility seriously dents the attractiveness of Aeroplan to a new partner. The new partner would have to have a network & offering very similar to AC's in order to have a hope in hell of retaining those customers. I don't know enough about AC to know who that would be.

EDIT: one positive is that AC might offer to buy points from Aimia to avoid having to explain to their most-valued customers, who will have accrued a lot of points, why those points are now worthless. Probably a pipe dream but it could be a major reputational issue for AC.
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on January 11, 2018, 03:21:19 PM
I bet more than 79% of deferred revenue is Aeroplan, simply because it is the oldest, so I don't think current run rate is the right number. Might not matter anyway.

I actually think if they could credibly tell AC that they are burning the program down unless they buy some points over (maybe for elites?) that threat might work, especially  if they do it soon. They still have dibs on AC frequent flier program for a couple more years, and AC won't want to be giving out worthless points during that time because it will hurt their main business.
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on January 11, 2018, 06:36:55 PM
I bet more than 79% of deferred revenue is Aeroplan, simply because it is the oldest, so I don't think current run rate is the right number. Might not matter anyway.

I actually think if they could credibly tell AC that they are burning the program down unless they buy some points over (maybe for elites?) that threat might work, especially  if they do it soon. They still have dibs on AC frequent flier program for a couple more years, and AC won't want to be giving out worthless points during that time because it will hurt their main business.


Well, that's something that I've never quite understood.  Irrespective of what AC does at this point, it is virtually certain that AC will totally piss off a great many of their customers by starting a new frequent flier program.  IMO, most Canadians are currently blissfully unaware that Aeroplan will be toast in 2.5 years, but in late 2019 or early 2020 it will become abundantly clear that their miles will be drastically devalued.  People will be furious with AC.

I understand that AC probably wanted to get a large slice of the considerable credit card pie and that AIM probably told them to take a long walk off a short dock.  But what I don't quite get is why AC appears to be of the view that the start-up costs for a new program and the bevy of pissed off customers is less important than scooping a couple hundred million bucks per year.  I confess that I am completely baffled about how it has come to this.  AIM has committed suicide and AC has "won" by alienating millions of their customers.

Personally, I lost a few thousand bucks by taking a small position in the prefs because I was convinced that a deal was in everybody's interest and that neither party would be stupid enough to go nuclear.


SJ
Title: Re: AIM.TO - Aimia
Post by: Uccmal on January 12, 2018, 04:39:05 AM
SJ,

I dont know about people being blissfully unaware.  I was sitting in Starbucks and overheard a conversation between two guys about the pointlessness (no pun intended) of using aeroplan anymore.

Just some scuttlebut.  IMO, word has spread and the run on the bank has started. 

Now this could just be selective hearing on my part as I lost a little money on this deal and its human nature to want confirmation that the loss was the right thing to do.  So take it for what its worth... just Scuttlebut. 
Title: Re: AIM.TO - Aimia
Post by: doc75 on January 12, 2018, 04:54:42 AM
For what it's worth, I've mentioned what's happening to a number of friends and others (essentially whenever someone happens to mention using their points).  In most cases, the reaction is along the lines "yeah, I heard they changed the program somehow".  Either that or total surprise.  Nobody I've spoken with has known what's really going on.

Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on January 12, 2018, 06:02:25 AM
On the value of scuttlebutt.
Often wondered about the value of this, especially the way Peter Lynch described it (more anecdotal).
Maybe better when done in a systematic way the way Philip Fisher described it?

When I built a position in MegaBrands some time ago, I used to visit stores and check the toy alleys. Not sure it added anything.
It may be helpful to try to obtain the opinion of competitors?

Anyways, for Aimia, I remember seeing posters (elsewhere) commenting on the volume of internet activity for certain sites that could potentially give an idea about the volume of redemptions. Useful?
Aimia is in the business of loyalty and reflecting on what happened to market share of US car manufacturers, the value of loyalty may be over-estimated. Easy to lose and hard to recover.
The "stickiness" of consumers is related to decision simplicity and trends.
It seems to me that players in the loyalty business should anticipate and react quickly to consumer preferences and business risks with key partners.
Of course, with Aimia, the trend can change but, in my opinion, what happened in the last year is not promising.

Like SJ, I'm "baffled" at how this was handled but when two people pull in two different directions, it is hard to see who will collect the prize. Not elegant.


Title: Re: AIM.TO - Aimia
Post by: zhengmit on January 12, 2018, 06:46:17 AM
Talked to a few people, and the risk of losing Sainsbury is real given the development.  Also people talked about discount and gating to protect Aimia.  Talked to some people and it seems the clause in the contract with credit card companies will prevent them doing this on a large scale.

Cigarbutt: what do you own these days and what do you like most?
Title: Re: AIM.TO - Aimia
Post by: petec on January 12, 2018, 07:11:10 AM
Irrespective of what AC does at this point, it is virtually certain that AC will totally piss off a great many of their customers by starting a new frequent flier program. 

They're not really starting a new one - they already have Altitude so what they are doing is preventing Altitude miles from going to Aeroplan, and allowing them to be redeemed in-house. They gave people 3.5 years to run down their points so they don't NEED to lose value - especially if AC offer to buy the few Aeroplan points remaining in 2020. And even if customers are pissed off, it may well be that they don't have much option other than to fly AC on many key routes.

Against that, these are incredible -ve WC businesses that require no capital and generate more cash the faster they grow. Bringing the NPV in-house is a smart move.

Just playing devil's advocate.



Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on January 12, 2018, 07:48:42 AM
Irrespective of what AC does at this point, it is virtually certain that AC will totally piss off a great many of their customers by starting a new frequent flier program. 

They're not really starting a new one - they already have Altitude so what they are doing is preventing Altitude miles from going to Aeroplan, and allowing them to be redeemed in-house. They gave people 3.5 years to run down their points so they don't NEED to lose value - especially if AC offer to buy the few Aeroplan points remaining in 2020. And even if customers are pissed off, it may well be that they don't have much option other than to fly AC on many key routes.

Against that, these are incredible -ve WC businesses that require no capital and generate more cash the faster they grow. Bringing the NPV in-house is a smart move.

Just playing devil's advocate.



No, they are starting a new program.  All of your existing Aeroplan miles from previous flights appear as if they will be orphaned.  All of your existing credit cards appear as if they will be orphaned.  A current Aeroplan participant has the option of participating in both the old program and the new one, but collecting loyalty points works best for consumers when a consumer concentrates his efforts on a few programs.  Consumers will be able to recover some value from their existing miles, but every consumer who makes the switch will end up losing to some degree (ie, you might be able to redeem the lion's share of your points, but there will still be a remainder which is insufficient for a flight reward....this could be a few thousand miles for some consumers or it could be many thousand for others).  Unless the new program is sexy as hell and includes very attractive start-up bonuses, there will be some unhappy people.

The loyalty business itself is certainly attractive, for all of the reasons you mentioned.  I don't at all doubt that AC wanted a bigger piece of the action from AIM, and when that didn't happen AC walked.  But, there will be start-up costs, and these shouldn't be ignored.  I do not know the size of the army of employees at AIM or the significance of AIM's information systems, but they will be costly to re-build (the information systems are the most important because much of the value is in the data).  After having been snake-bitten by the abandonment of Aeroplan, it will be interesting to see how quickly Canadian financial institutions will sign agreements to issue new credit cards (that's where much of the money is earned).  In particular, if I were TD, I'd be pissed about having spent a pile of money on an Aeroplan contract and having invested a pile of money in promoting those cards on television only to have had the rug ripped out from underneath me.  It might take a while to sign up loyalty partners, like the banks, to profitable contracts.  Finally, as I suggested earlier, a new program would be best launched with some sort of smoke and noise, preferably with attractive sign-up bonuses to get clients on board.  It could be a few years before AC makes any money of the new program, but presumably it will ultimately be profitable.

So, will there be any behavioural change from AC's existing client base?  With Aeroplan abandoned and a new program launched will AC retain all of its existing business, or will some of the flying public move their business to WestJet?  A good loyalty program does what its name implies, it builds loyalty.  When you abandon the program, do you effectively reduce your clients' switching costs?  This remains to be seen, but I personally have always considered the value of $20 of Aeroplan miles when doing price comparisons between AC and WJ.  Will this make WJ more attractive for the flying public?

Still baffled that an agreement wasn't reached...

SJ
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on January 12, 2018, 09:11:16 AM
I don't have a position here so haven't done this, but if you want scuttlebutt, I would read this:
https://www.flyertalk.com/forum/air-canada-aeroplan/1841934-air-canada-launch-its-own-loyalty-program-2020-a-68.html

It's the 1000+ post thread on the change on Flyertalk, the forum for people who really, really care about frequent flier programs and airline status. These are the customers both AC and Aeroplan will need to keep, so what they are saying is pretty important, imo.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on January 12, 2018, 10:32:20 AM
Hi zhengmit,

Leaving Aimia for a minute.

Sorry, wrong person to ask at this point.
If you are looking for investable ideas, there are out there on this Board superior participants who likely continue to identify and benefit from profitable opportunities.

I came to this Board about a year ago in the context of my disappearing ability to find targets with a sufficient margin of safety in my investment circle. Since I started to participate, my investment IQ has moved from 78 to 82. Little progress, not because of the absence of quality on this Board but because of mental slowness/resistance.

I have long positions in cash (which I don’t like, but can tolerate) and long-term USA government bonds, (TLT), a relatively large position that I have trimmed down to less than 10% of portfolio since 2011.

This year, I invested in Aimia as I felt there was potential value realization in the preferreds associated with a rapid reconnection with Air Canada.
I see you are new to the Board and would like to read your answer to your question.

Back to Aimia.

Title: Re: AIM.TO - Aimia
Post by: petec on January 22, 2018, 12:43:23 AM
FWIW I am out of the prefs with a 20-30% profit in 18 months depending on the account. Oddly, I consider this to have been a highly successful investment. My assessment when I bought was that Aimia would probably not lose the AC contract, but that if they did the prefs would likely still be worth the price I paid and might even be worth par in a breakup. I also thought they'd be a great security to hold if rates rose. To have witnessed the loss of the AC contract and still made money feels like it proves my thesis. Sitting here today though, it's much harder to assess the probability of real upside, which hinges on getting another partner or breaking up the business in such a way that the pref holders receive par value. Also, the probability of the worst case outcome (the loss of AC and a run on the bank per my SOTP above) has risen markedly because the first part of it has already happened.

If I am making a mistake here it is because I am anchoring to my purchase price - when AC cut the cord I decided to have faith in my original thesis and not realise the loss; now that I can realise a profit, I am doing so. If I had bought at 9 I'd probably have sold earlier, but I bought between 10 and 12. That's probably an emotional red flag.

Thanks to everyone on here for a) flagging the opportunity and b) helping me understand it!
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on February 01, 2018, 05:16:47 AM
Looks like AIM has raised CAD$105m by selling one of its British loyalty programs:

https://www.theglobeandmail.com/report-on-business/aimia-sells-nectar-loyalty-card-business-to-uks-sainsburys-for-105-million/article37814207/


First they cut the dividend to staunch the cash outflows and now they are selling assets to raise cash.  Will it be enough?


SJ
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 01, 2018, 05:41:42 AM
The transaction is effective now, the value is quite low and has cash flow implications.
https://www.newswire.ca/news-releases/aimia-sells-nectar-business-to-sainsburys-672106213.html

They still have Aeromexico and their "core" Aeroplan program.
Title: Re: AIM.TO - Aimia
Post by: zhengmit on February 01, 2018, 05:42:26 AM
In 2016, Sainsbury contributed C$340 and the international segment total gross billing is C$617.5 and EBITDA margin on gross billing is 11.3%.  Since Nectar has gross billing other than Sainsbury, its gross billing is probably C$425m range (assuming Sainsbury accounts for 80% of Nectar's gross billing).  Using 11% EBITDA margin, so Aimia sold the business at 2.5x EBITDA (105/42.5).  Not sure this $105 is USD or CAD but you get the picture.  Nectar does represent another major risk in renewing and there is another C$400m liability associated with it.  At this valuation, what can I say?
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 02, 2018, 08:41:06 AM
petec,
Short term wise, your decision to sell was timely. Good for you.
Any thought on the Nectar conclusion?

The last transaction perhaps reflects the price to pay for disorderly redemption.
Despite and maybe because of recent troubles, will look into this again.

This may become interesting in an orderly liquidation-like scenario. Management will need to cooperate.
Title: Re: AIM.TO - Aimia
Post by: petec on February 02, 2018, 10:19:44 AM
My thoughts, roughly summarised, are: "Christ, that was lucky".

If I'd thought Nectar was only worth $100m I'd have sold sooner (see my SOTP above).

I wonder whether Sainsbury's basically said: sell it to us at a knockdown price or we leave.

Future looks very binary to me on this one. And my concern is this: what incentive does any new Aeroplan partner have to sign early? Better to wait until they see the whites of Aeroplan's management's eyes in, say, late 2019.
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on February 02, 2018, 10:36:04 AM
The only partner they might get on similar terms to the old AC deal would be a startup. Someone like Canada Jetlines, who would benefit from Aeroplan name recognition and a big chunk of ticket purchases right at startup.

Established airlines all have their own programs already, and would mostly be happy to sell tickets to Aeroplan at regular retail price.
Title: Re: AIM.TO - Aimia
Post by: mcliu on February 02, 2018, 01:30:22 PM
Looks like AIM has raised CAD$105m by selling one of its British loyalty programs:

https://www.theglobeandmail.com/report-on-business/aimia-sells-nectar-loyalty-card-business-to-uks-sainsburys-for-105-million/article37814207/


First they cut the dividend to staunch the cash outflows and now they are selling assets to raise cash.  Will it be enough?


SJ

Are they really raising cash here since they're paying Sainsbury $183 million to cover redemptions..?

"Along with the sale of Nectar business and Aimia’s Intelligent Shopper Solutions U.K. and Intelligent Research businesses, and a 50% equity stake in its i2c joint venture with Sainsbury’s, the agreement also provides for the transfer to Sainsbury’s of approximately $183 million (£105 million) of cash providing coverage against the Nectar redemption liability. Aimia will continue to deliver customer insights and data analytics platforms to customers outside the U.K."

"As at September 30, 2017, Aimia had close to $670 million of cash and cash equivalents (including investments in corporate and government bonds). Adjusting for and giving effect to the Nectar transaction, Aimia’s net cash and liquidity position will be reduced by approximately $174 million."
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on February 02, 2018, 02:10:51 PM
Looks like AIM has raised CAD$105m by selling one of its British loyalty programs:

https://www.theglobeandmail.com/report-on-business/aimia-sells-nectar-loyalty-card-business-to-uks-sainsburys-for-105-million/article37814207/


First they cut the dividend to staunch the cash outflows and now they are selling assets to raise cash.  Will it be enough?


SJ

Are they really raising cash here since they're paying Sainsbury $183 million to cover redemptions..?

"Along with the sale of Nectar business and Aimia’s Intelligent Shopper Solutions U.K. and Intelligent Research businesses, and a 50% equity stake in its i2c joint venture with Sainsbury’s, the agreement also provides for the transfer to Sainsbury’s of approximately $183 million (£105 million) of cash providing coverage against the Nectar redemption liability. Aimia will continue to deliver customer insights and data analytics platforms to customers outside the U.K."

"As at September 30, 2017, Aimia had close to $670 million of cash and cash equivalents (including investments in corporate and government bonds). Adjusting for and giving effect to the Nectar transaction, Aimia’s net cash and liquidity position will be reduced by approximately $174 million."



Yep, short term it looks like it might be cash-reducing.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 02, 2018, 02:25:14 PM
"Yep, short term it looks like it might be cash-reducing."
From the CC (1st question), it appears that the 183 million was the price to pay to transfer the matching redemption reserve liability of about 230 million.
Nectar is not Aeroplan but it helps to paint the picture if redemption activity would pick up in their core program.
It seems that they were in a tough spot.
"Some wounds never heal, they just stop bleeding". Unknown
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 05, 2018, 08:45:41 AM
Had the impression that the recent news may cause an excessive downward movement in the prices of the shares and especially preferreds. Looked into this. Conclusion: the worse may be yet to come.

I had run various scenarios for Nectar and the end result, with what is disclosed now, is in the very low range of potential outcomes.

The transaction implies that Aimia had a weak negotiating position but may also imply that redemption trends were increasingly unfavorable at Nectar. Average life of mile for Nectar was 15 months vs 30 months for Aeroplan but the result shows the corrosive power of the redemption liability over time if there is an imbalance between accumulation and redemption.

Re-assessed going way back in the history. Interesting because parallels can be drawn with the principles behind P+C insurance underwriting and building a float (asset) to balance reserves (liability). When Aimia changed their breakage rate from 18% to 11% and made other “enhancements” to the Aeroplan program in 2013, the banks were asked to contribute but dissection of the numbers shows the beginning of a diverging trend between the asset side of the business and the growing redemption liability. Looking back, I submit that it would have been reasonable to build a larger reserve (in addition to the required reserves by contracts) of liquid assets to match the growing liability. There is no problem with that divergence as long as the business grows or at least maintains a balance between accumulation and redemption. Since 2012, the total (short term and long term) redemption liability has grown to 3,33 billion from 2,25 billion and gross billings as an indicator of accumulation is now about the same level (2017 annualized +/- 1,66 billion versus 2012 1,63 billion).

The divergence continues to deteriorate and the ratio of the current redemption liability over non-current is increasing. Will update when Q4 results are reported. I assume that goodwill at Nectar will be written down to zero and wonder about the potential associated effect on Aeroplan. A non-cash event but significant in the sense that liabilities may have a stronger tendency to bite going forward.

What this means has serious implications for the cash flow position going forward.

I see three potential scenarios:

1-Aimia becomes exposed to a negative trend in accumulation/redemption and the feedback loop reinforces and it becomes a runoff. Using different scenarios and keeping in mind different inputs from previous disclosures and the more recent Nectar transaction, conceptually, the owners of the unredeemed points would be squeezed but would rank higher than everything below in the structure including preferreds. My take is that it could happen fast and this means 0 value for the preferreds.

2-Aimia “reinvents” its Aeroplan program with new partners. The way I see it, even in the best of circumstances, the new Aeroplan would operate on a smaller scale and would be less profitable, which means that the redemption liability would negatively pressure the potential positive cash flow that they could generate. Using different scenarios, my take is that the preferred would be then the fulcrum security but the eventual recovery may be less than present market value and the value eventually recovered may have to be discounted as this may play out over a fairly long period.

3-Air Canada gets involved. This is a mistake I made earlier because I overestimated the possibility that Air Canada gets involved and the amount that they would pay. I assume that there was a large discrepancy between their assessment and Aimia’s opinion on how challenged Aimia was in early 2017. Air Canada has time on their side and can choose when/if they want to recover value in Aimia. I cannot precisely assess the cost for them to set up a new loyalty program but it must be high. Nevertheless, buying Aimia now would mean that they would have to transfer on their books a huge redemption liability. If Air Canada makes an offer for Aimia, I would tend to think that it will be very low.

Here’s a recent report by GMP, who, I think, have been more optimistic than most. They appear to describe a more cautious outlook now:

 https://gmpsecurities.bluematrix.com/sellside/EmailDocViewer?encrypt=9eed26e1-3352-476f-a960-e24ca26546d7&mime=PDF&co=Gmpsecurities&id=noauthentication@bluematrix.com&source=libraryView&htmlToPdf=true

I submit that their work is good but I would also say that the numbers suffer from what I would call the pro-forma bias, ie the forward-looking numbers are largely derived from the rear-view mirror. The model may fail to account for the fact that the large redemption liability will have a tendency to translate into higher revenues but also higher net negative cash flows.

Club Premier remains a wild card but, like Tor Lonnum , the previous CFO said on a previous conference call, on this one also, Aimia is not in the driver’s seat.
I’m not the type to short individual names and will keep following just in case, but decided to share this and see if anybody can come up with a more optimistic assessment.

Title: Re: AIM.TO - Aimia
Post by: petec on February 05, 2018, 09:25:09 AM
When Aimia changed their breakage rate from 18% to 11% ... since 2012, the total redemption liability has grown to 3,33 billion from 2,25 billion and gross billings as an indicator of accumulation is now about the same level (2017 annualized +/- 1,66 billion versus 2012 1,63 billion).


Odd - you would think less breakage = more redemptions and less redemption liability.


1-Aimia becomes exposed to a negative trend in accumulation/redemption and the feedback loop reinforces and it becomes a runoff. Using different scenarios and keeping in mind different inputs from previous disclosures and the more recent Nectar transaction, conceptually, the owners of the unredeemed points would be squeezed but would rank higher than everything below in the structure including preferreds. My take is that it could happen fast and this means 0 value for the preferreds.


Where I am more bullish than you is that I think Aimia can change redemption prices, e.g. they could double the points charged for a reward. That would either stop a run or diminish its impact on cash, leaving enough to satisfy the prefs. In effect this means the prefs rank above pointholders in the liability waterfall.

I can't see AC getting involved and can only imagine they would be sued to kingdom come for destroying Aimia and then buying it cheap.

As I have said before, Aimia made a catastrophic error in paying out too much float as dividend. They clearly overestimated the probability AC would renew, which was an unforgivable error given that AC had sold its shares in Aimia and had almost no incentive to remain.

My best guess is that some big airline will partner with Aimia some time in 2019, but the terms will be lousy - Aimia will have to pay something close to full prices for seats, thereby transferring a lot of the value of the redemption liability to the new partner. That might or might not stabilise the cash situation; if it does, Aimia might make enough to start paying the dividend on the prefs, which might therefore do OK; if it doesn't then Aimia's cash flows will simply fund redemptions for years to come. Either way I would not touch the common with a bargepole.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 05, 2018, 09:44:08 AM
"Odd - you would think less breakage = more redemptions and less redemption liability."

If you invite 100 people to your pizza party and expect that 18 people won't come and then "discover" that only 11 people won't come, yes, you can expect more pizza to be consumed but you have to modify (up) your order. My take is that Aimia is in the unfortunate position of making an accounting profit on their revenues, but more recognized revenues means more cash leaving head office. Cash is most expensive when you most need it.
 
To complete the parallel with the insurance business, Aimia can "control" the combined ratio (modify terms of the contract) but they cannot easily control the timing of redeeming triggers and they now have to deal with the fact that short term liability reserves are potentially much larger than their asset reserves.

I now see Aimia as a liquidating scenario but thanks for the perspective.
Title: Re: AIM.TO - Aimia
Post by: mcliu on February 05, 2018, 10:32:33 AM
Is it possible for Aimia to stop redemptions or declare that Aeroplan points are worthless?
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on February 05, 2018, 11:22:36 AM
Is it possible for Aimia to stop redemptions or declare that Aeroplan points are worthless?


Yes, it can be done quite easily.  A long haul flight in North America currently requires 25,000 miles.  Aimia can arbitrarily bump that up to 500,000 miles if it chooses (along with changes to overseas flights).  In one stroke of a pen, the miles would be devalued 95%.

In response, it's possible that plan participants could try to get a class certified and seek legal redress, but as far as I understood, the legal relationship between Aimia and the general public constitutes a gratuitous promise, so it's not clear to me that participants could even get a favourable court decision.


SJ
Title: Re: AIM.TO - Aimia
Post by: petec on February 05, 2018, 01:24:11 PM
"Odd - you would think less breakage = more redemptions and less redemption liability."

If you invite 100 people to your pizza party and expect that 18 people won't come and then "discover" that only 11 people won't come, yes, you can expect more pizza to be consumed but you have to modify (up) your order. My take is that Aimia is in the unfortunate position of making an accounting profit on their revenues, but more recognized revenues means more cash leaving head office.
 

Yes, but the redemption reserve is held for points that haven't been redeemed yet. Breakage revenue is recognised on billing, not redemption. If the redemption liability is rising, that implies points are not being redeemed, as would be the case if breakage is rising. If breakage drops, more points are redeemed, cash flows out, and the redemption liability falls.

Or am I being thick?
Title: Re: AIM.TO - Aimia
Post by: petec on February 05, 2018, 01:25:43 PM
Is it possible for Aimia to stop redemptions or declare that Aeroplan points are worthless?


Yes, it can be done quite easily.  A long haul flight in North America currently requires 25,000 miles.  Aimia can arbitrarily bump that up to 500,000 miles if it chooses (along with changes to overseas flights).  In one stroke of a pen, the miles would be devalued 95%.

In response, it's possible that plan participants could try to get a class certified and seek legal redress, but as far as I understood, the legal relationship between Aimia and the general public constitutes a gratuitous promise, so it's not clear to me that participants could even get a favourable court decision.


SJ

This is why, ultimately, there won't be a run and the prefs rank above the points. IF management choose this course.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 05, 2018, 06:00:00 PM
Good discussion.

From AR 2016:

Unfunded Future Redemption Costs
In the coalition loyalty program model, Gross Billings are derived from the sale of Loyalty Units to Accumulation Partners. The earnings process is not complete at the time a Loyalty Unit is sold as most of the costs are incurred on the redemption thereof. Based on historical data, the estimated period between the issuance of a Loyalty Unit and its redemption is currently approximately 30 months for the Aeroplan Program and 13 months for the Nectar Program; however, Aeroplan and Nectar have no control over the timing of the redemption or the number of units redeemed. Aeroplan and Nectar currently use proceeds from Gross Billings (which are deferred for accounting purposes) in the fiscal year from the issuance of the unit to pay for the redemption costs incurred in the year. As a result, if Aeroplan or Nectar were to cease to carry on business, or if redemption costs incurred in a given year were in excess of the revenues received in the year from the issuance of the Loyalty Units, they would face unfunded Future Redemption Costs, which could increase the need for working capital and, consequently, affect the payment of dividends to Shareholders. (my bold)

Changes to Coalition Loyalty Programs
From time to time we may make changes to our coalition loyalty programs that may not be well received by certain segments of the membership and may affect their level of engagement. In addition, these members may choose to seek such legal and other recourses as available to them, which if successful, could have a negative impact on results of operations and /or reputation.

-------------------------

In terms of revenue recognized related to breakage:

"The amount of revenue recognized related to Breakage is based on the number of Loyalty Units redeemed in a period in relation to the total number expected to be redeemed, which factors in the Corporation's estimate for Breakage. Breakage represents the estimated Loyalty Units that are not expected to be redeemed by members." (my bold)

--------------------------

In terms of the redemption reserve:

"Aeroplan maintains the Aeroplan Miles redemption reserve (the "Reserve"), which, subject to compliance with the provisions of the Corporation’s credit facilities, may be used to supplement cash flows generated from operations in order to pay for rewards during periods of unusually high redemption activity associated with Aeroplan Miles under the Aeroplan Program. In the event that the Reserve is accessed, Aeroplan has agreed to replenish it as soon as practicable, with available cash generated from operations. To date, Aimia has not used the funds held in the Reserve.  At December 31, 2016, the Reserve amounted to $300.0 million and was included in short-term investments and long-term investments."  (my bold)

----------------------------
So,
-Maybe a way to look at this is to see the potential cash flow impact of a mismatch between accumulation and redemption.
-Concerning what SJ alludes to, I agree that they can modify their "contracts" with people holding the points but that may contribute to the potential mismatch described above. Not long ago, there was a lot of uproar from consumers with Air Miles when they tried to make miles expire. They had to retract and apologize. This is uncharted territory but if this comes down to the wire, it is hard to see equity holders collecting before consumers.
Would you continue accumulating points if they lose redeeming value?
Title: Re: AIM.TO - Aimia
Post by: zhengmit on February 06, 2018, 06:24:40 AM
"Yes, it can be done quite easily.  A long haul flight in North America currently requires 25,000 miles.  Aimia can arbitrarily bump that up to 500,000 miles if it chooses (along with changes to overseas flights).  In one stroke of a pen, the miles would be devalued 95%.

In response, it's possible that plan participants could try to get a class certified and seek legal redress, but as far as I understood, the legal relationship between Aimia and the general public constitutes a gratuitous promise, so it's not clear to me that participants could even get a favourable court decision.
"


People always assume this is easy and I was made to believe this as well.  If you talk to any consultant, they will tell you it is doable in theory but impossible in reality.  In Aimia's contract with TD or CIBC, there is legal clause to prevent Aimia to devalue the points to a large extent.  There is some clause requiring that Aimia to maintain a reasonable value for points.  Without reading contract, outsiders have no idea but devaluing points by 95% is simply impossible (10-15% per year might get by but I am even not sure about that).
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on February 06, 2018, 06:39:52 AM
"Yes, it can be done quite easily.  A long haul flight in North America currently requires 25,000 miles.  Aimia can arbitrarily bump that up to 500,000 miles if it chooses (along with changes to overseas flights).  In one stroke of a pen, the miles would be devalued 95%.

In response, it's possible that plan participants could try to get a class certified and seek legal redress, but as far as I understood, the legal relationship between Aimia and the general public constitutes a gratuitous promise, so it's not clear to me that participants could even get a favourable court decision.
"


People always assume this is easy and I was made to believe this as well.  If you talk to any consultant, they will tell you it is doable in theory but impossible in reality.  In Aimia's contract with TD or CIBC, there is legal clause to prevent Aimia to devalue the points to a large extent.  There is some clause requiring that Aimia to maintain a reasonable value for points.  Without reading contract, outsiders have no idea but devaluing points by 95% is simply impossible (10-15% per year might get by but I am even not sure about that).


So, to clarify your argument, you are essentially saying that AIM risk litigation from a couple of its partners if it does a massive devaluation.  That's definitely a possibility, because the relationship between CIBC or TD and AIM is not a gratuitous promise.  In Canadian courts, litigants need to demonstrate that economic damage has occurred.  It would be very interesting to see the argumentation that CIBC or TD would make to support that contention.  And it would be very interesting to see how many years it would take for that type of litigation to work its way through the system (perhaps it would take more than five years but fewer than ten?). 

At this point, if I were running AIM, litigation from the banks wouldn't be my primary concern.  IMO, they need to devalue the outstanding miles and they should begin the process soon.  Even two or three devaluations of 10 to 15 percent each over the next two or three years would go a long way to protecting AIM's solvency.  If they don't deal with their immediate solvency challenge, they won't even be around to worry about litigation from the banks in 5 or 10 years.


SJ
Title: Re: AIM.TO - Aimia
Post by: petec on February 07, 2018, 12:40:59 AM
"Yes, it can be done quite easily.  A long haul flight in North America currently requires 25,000 miles.  Aimia can arbitrarily bump that up to 500,000 miles if it chooses (along with changes to overseas flights).  In one stroke of a pen, the miles would be devalued 95%.

In response, it's possible that plan participants could try to get a class certified and seek legal redress, but as far as I understood, the legal relationship between Aimia and the general public constitutes a gratuitous promise, so it's not clear to me that participants could even get a favourable court decision.
"


People always assume this is easy and I was made to believe this as well.  If you talk to any consultant, they will tell you it is doable in theory but impossible in reality.  In Aimia's contract with TD or CIBC, there is legal clause to prevent Aimia to devalue the points to a large extent.  There is some clause requiring that Aimia to maintain a reasonable value for points.  Without reading contract, outsiders have no idea but devaluing points by 95% is simply impossible (10-15% per year might get by but I am even not sure about that).


So, to clarify your argument, you are essentially saying that AIM risk litigation from a couple of its partners if it does a massive devaluation.  That's definitely a possibility, because the relationship between CIBC or TD and AIM is not a gratuitous promise.  In Canadian courts, litigants need to demonstrate that economic damage has occurred.  It would be very interesting to see the argumentation that CIBC or TD would make to support that contention.  And it would be very interesting to see how many years it would take for that type of litigation to work its way through the system (perhaps it would take more than five years but fewer than ten?). 

At this point, if I were running AIM, litigation from the banks wouldn't be my primary concern.  IMO, they need to devalue the outstanding miles and they should begin the process soon.  Even two or three devaluations of 10 to 15 percent each over the next two or three years would go a long way to protecting AIM's solvency.  If they don't deal with their immediate solvency challenge, they won't even be around to worry about litigation from the banks in 5 or 10 years.


SJ

Agreed - especially if the devaluation is temporary i.e. Aimia reverses it having done a deal.

Of course the risk is that a devaluation simply accelerates a run. It would reduce the cash outflow, but also reduce the buying power Aimia represents, and therefore reduce the attractiveness to a new partner. There are no simple answers here.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 07, 2018, 12:24:42 PM
Here is an interesting analysis that would tend to validate a more optimistic assessment:
https://seekingalpha.com/article/4143261-aimia-clown-car-fell-gold-mine-still-golden

There is a lot of info circulating on Aimia and the quality is uneven but this piece is quite good in terms of business insights and relevance.
Still, the author describes a potentially favorable transition and, at the same time, suggests that the Board and mangement should be replaced...
Recent Sedar disclosures suggest that a shareholder may want to take a more active role.

I viewed this investment mainly as event driven and not as a transition opportunity.
AIM will report Q4 numbers on Valentine's day.

Title: Re: AIM.TO - Aimia
Post by: bizaro86 on February 07, 2018, 01:08:25 PM
Here is an interesting analysis that would tend to validate a more optimistic assessment:
https://seekingalpha.com/article/4143261-aimia-clown-car-fell-gold-mine-still-golden

There is a lot of info circulating on Aimia and the quality is uneven but this piece is quite good in terms of business insights and relevance.
Still, the author describes a potentially favorable transition and, at the same time, suggests that the Board and mangement should be replaced...
Recent Sedar disclosures suggest that a shareholder may want to take a more active role.

I viewed this investment mainly as event driven and not as a transition opportunity.
AIM will report Q4 numbers on Valentine's day.

Some of the assumptions there don't seem very conservative. The part where they take the PV of the remaining term on the Mexican contract and then put a terminal value at that level seems especially aggressive to me. I know their airline partner owns part of the business there, but why wouldn't you expect the terms to get worse on a renewal.

I don't think Air Miles is analogous at all, and Aeroplan has negative momentum getting new partners, which they had even prior to losing Air Canada. They lost Sobeys (big grocery chain) to Air Miles when they bought Canada Safeway. They also lost Rexall to Air Miles. Basically, aeroplan is the second tier here, and without Air Canada I don't see why retail partners would sign up. If they get Porter or someone similar maybe that helps, but why would those (second tier) airlines give them a big discount?

Air Canada gave them the discount because they were selling Aimia equity for big $$. What does someone else get out of it? Maybe you get 3% off for buying in bulk, but that'd be about it.
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on February 07, 2018, 03:54:51 PM
Well, that's certainly the optimistic viewpoint, and it might actually work out that way.  AIM will be okay if their Aeroplan mile holders do not rush to the exits.  And on that point, so far, so good.

The risk is principally one of cash flow as rewards reserves are  only ~$400m while the value of outstanding miles awarded is $2b+.  You can add some cash from ops to that, but you still end up with considerably less cash available to fund rewards than the value of the outstanding miles.  If a healthy percentage of plan participants redeem, it could be ugly.  For whatever reason, the Seeking Alpha cash stress test doesn't seem to have examined scenarios where participants redeem more heavily. The rest of the cash flow analysis looks thorough and has reasonable assumptions, but there is also much doubt about the acquisition of retail partners as AirMiles seems to have already wrapped up the most attractive targets.

Beyond the risk of higher redemptions, there remains much doubt in my mind about the behaviour of credit card holders.  In particular, to my knowledge all of the cards have an annual fee.  Are people going to continue to collect de-valued Aeroplan miles and blissfully pay the annual fee and forego other rewards?  Certainly consumers have demonstrated a great deal of inertia in their behaviour, but how many will get a clue and switch to a better credit card?  The cash stress test assumes that they'll lose 10% of the credit card mile accumulation, but it is reasonable to believe that 90% of card holders will be oblivious to what is happening to the program, or too lazy to bother changing their credit card to a different program? I'm a little surprised that the pessimistic case didn't contemplate a higher level of abandonment.

I would certainly acknowledge that most Canadians seem blissfully unaware of what is happening to Aeroplan, but is it truly reasonable to expect this to continue through 2020?  The next couple of quarterly reports will be fascinating.


SJ
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 15, 2018, 05:24:17 AM
Q4 results are out.
SE (even including goodwill and intangibles) is negative as the real value of the Nectar franchise is off the books.

My take, on the whole, is the absence of a major break in the trend. Aimia will try to become a "better" basic loyalty plan that will look very much like Air Miles which is already well established in the Canadian (crowded?) market. So, over time, I expect a declining intrinsic enterprise value. May not be a straight line.

Too early for a significant trend but dissecting some significant numbers for the core Aeroplan coalition program:

Accumulation activity 2017 (YoY variance, %):   Q1:5,4   Q2:1,2   Q3:2,0   Q4:(0,9)
Redemption activity 2017   (YoY variance, %):   Q1:3,9   Q2:1,8   Q3:4,7   Q4:9,9
Title: Re: AIM.TO - Aimia
Post by: petec on February 15, 2018, 06:06:48 AM
Ha - that trend is really interesting!
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on February 15, 2018, 08:59:30 AM
Q4 results are out.
SE (even including goodwill and intangibles) is negative as the real value of the Nectar franchise is off the books.

My take, on the whole, is the absence of a major break in the trend. Aimia will try to become a "better" basic loyalty plan that will look very much like Air Miles which is already well established in the Canadian (crowded?) market. So, over time, I expect a declining intrinsic enterprise value. May not be a straight line.

Too early for a significant trend but dissecting some significant numbers for the core Aeroplan coalition program:

Accumulation activity 2017 (YoY variance, %):   Q1:5,4   Q2:1,2   Q3:2,0   Q4:(0,9)
Redemption activity 2017   (YoY variance, %):   Q1:3,9   Q2:1,8   Q3:4,7   Q4:9,9


Ouch.  The Q4 numbers are pretty scary.  I guess we'll see in the coming quarters whether this is a one-time blip, or a real trend that might have adverse cashflow consequences.
Title: Re: AIM.TO - Aimia
Post by: zhengmit on February 16, 2018, 11:53:12 AM
What is difference between accumulation vs. gross billing?  GB is up 2.0% YoY and I assume that people are still accumulate points YoY up despite rising redemption. 
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 16, 2018, 01:44:44 PM
Gross billings and accumulation activity correspond to the same basic idea: selling Aeroplan units (miles issued) for cash.
You can expect quarterly noise in the normal course of operations and there are variable promotional activities that may cause fluctuations.
Historically, the Aeroplan Program has shown a seasonal pattern with relatively higher redemption activity in the first half of the year and relatively higher accumulation activity in the second half of the year.
So too early for a clear trend and you may complement your thought process by considering how you would react as a consumer with an Aeroplan credit card going forward.
I wonder if some of the consumers who still "re-engage" may simply have a target in mind before more definitive redemption?
 
Title: Re: AIM.TO - Aimia
Post by: clutch on March 12, 2018, 09:34:38 PM
Looks like they lost the partnership with Esso as well:
https://www.aeroplan.com/essonews.do?currentLanguage=en#esso-faq
Title: Re: AIM.TO - Aimia
Post by: gokou3 on April 11, 2018, 04:56:27 PM
Some passionate writing here:

Time To Grab My Pitchfork (AIM Edition)
http://adventuresincapitalism.com/2018/04/11/time-grab-pitchfork-aim-edition/

Disc: long preferred B, no voting rights
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on April 11, 2018, 05:19:25 PM
That could have used more math and less immolation graphics. I don't see how you can get to that price target on what will be left after they drive aeroplan into the ground.

I think if a second tier or startup airline was looking for a partner, they'd pick PC Optimum over aeroplan.

Recap: aeroplan has lost a big grocer, a big pharmacy, and a big gas stain chain in the last few years. PC Optimum is a new program that has the biggest grocer, the biggest pharmacy, and the gas station that aeroplan lost. I know who I'd pick.


Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on April 11, 2018, 08:10:15 PM
From the article:
"On August 25th, Aimia announced the sale of its Air Miles Trademarks for total consideration of $53,750,000 (before up to $13,750,000 of future payments). This represented a sale price of approximately 7 times current pre-tax cash flow, at a time when well-known trademarks often transact at approximately two to three times this multiple."

I don't think that is a reasonable assessment. From what I know of this market and of of Diversified Royalty Corp (DIV), the purchase price was perhaps 10 to 25% lower than comparable transactions, reflecting distress at Aimia.

Anecdotal, but I've met a few Aeroplan frequent flyers lately. I understand that 1-they plan to use their points for AC flights and see 2020 as a clear deadline (ie aim to have points at zero then), 2-find very little value elsewhere in the redemption offers but 3-are relatively hopeful that Aimia will come up with alternatives to the Air Canada option and are still planning to accumulate points once that happens.

The annual meeting happens soon and there will be Boardroom changes. I understand Mr. Micheal Fortier is leaving. I see this as a negative because he is somebody I respect (competence and integrity).

Title: Re: AIM.TO - Aimia
Post by: bathtime on April 12, 2018, 05:24:07 PM
Mittleman continue to increase their stake, now at 16%+, and now have 3 board positions which happened following this article:

http://business.financialpost.com/news/fp-street/u-s-shareholders-look-to-bust-some-heads-at-aimia-meeting





Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on April 13, 2018, 01:37:48 PM
I thought the following was interesting:
https://seekingalpha.com/article/4162810-mittleman-investment-management-1q18-commentary

The investment thesis primarily depends if you can think Aimia can renew its redemption offers.
IMO, the renewed option will disappoint.

However, from reading the above, learned two things:
1-will know more about the game plan on April 26th.
2-some assets (with real value) are apparently legally separated in a different shell and that is very interesting from the preferred point of view.

"Another key facet of our investment thesis with Aimia is that there is plenty of value in other Aimia holdings to protect us should Aeroplan not survive. That subsidiary, Aimia Canada Inc., is distinct from the holding company, Aimia Inc., so liabilities from that segment shouldn't destroy the value of the other assets held by the holding company, assets which include, for example, its 49% ownership of PLM Premier (5.3M member, fast growing coalition loyalty program anchored by Aeromexico, Mexico's flagship airline)."

...

"Even if Aeroplan were to implode on a tidal wave of redemptions due to the fear that Air Canada flight options would not be replaced by comparable seats on other airlines flying similar routes, then the other assets Aimia owns appear to be worth no less than US$1.60 (C$2.00), net of debt and preferred stock, which is 19% higher than the current price of US$1.34."

Will try to look into this as I understood that the redemption liability could negate the value of remaining assets in a liquidation scenario.
Title: Re: AIM.TO - Aimia
Post by: gokou3 on April 13, 2018, 04:05:15 PM
Another fund wanting against the current board:

22NW Fund Issues Statement Against the Re-Election of Aimia Board of Directors
https://web.tmxmoney.com/article.php?newsid=6270142716812319&qm_symbol=AIM

Quote
22NW owns approximately 4.3 million shares, or about 3%, of Aimia.

...we note that the Company has adopted a Majority Voting Policy pursuant to which any director nominee receiving fewer than 50% of votes cast "for" his or her election at the AGM is required to immediately tender his or her resignation."

Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on April 27, 2018, 04:50:48 AM
Q1:
Numbers for the core Aeroplan coalition program:

Accumulation activity (YoY variance, %):  2017    Q1:5,4   Q2:1,2   Q3:2,0   Q4:(0,9)      2018     Q1:(2,8)
Redemption activity   (YoY variance, %):  2017    Q1:3,9   Q2:1,8   Q3:4,7   Q4:9,9         2018     Q1:9,6

The burn/earn ratio was at 109% in Q1. They expect moderation of that trend but redemption pressure is likely to persist.
PLM continues to perform well.

New CEO to come and evolving business model. The most likely scenario is to carry on until the 2020 transition.

Seen as a going concern, there is some potential value for the common share although I still think that, post 2020, the preferred will be the fulcrum security.

The problem I see at this point is the fact that preferred shareholders have a passive role and I can't clearly see how the preferred price may effectively relate to its share of the enterprise value as there are no dividends in sight and as the risk profile will tend to remain elevated during the transformation. The bank debt will continue to put pressure on cash flows as leverage is expected to come down and entities that are forcing change are common shareholders.

Preferred shares may come to be seen as cheap leverage with dividends that simply accrue.
The whole process may take a while and one has to discount the eventual value that may be realized.
Title: Re: AIM.TO - Aimia
Post by: KCLarkin on June 13, 2018, 02:14:45 PM
https://www.bnnbloomberg.ca/a-very-big-deal-westjet-rbc-team-up-for-new-loyalty-program-1.1092288
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on June 13, 2018, 04:14:34 PM
Thanks for the link.

In the evolving crowded Canadian loyalty market:
-WestJet and RBC team up to increase market share.
-Air Canada (IMO unlikely to team again with Aimia) values (NPV) its own loyalty program at 2 to 2,5 billion$.
-Air Miles continues to consolidate its market share at the plain vanilla loyalty level.

What is left for Aimia?
Title: Re: AIM.TO - Aimia
Post by: vikx01 on July 25, 2018, 05:28:53 AM
Air Canada, TD, CIBC, Visa offer to buy Aimia’s Aeroplan in $2.25B deal
https://www.bnnbloomberg.ca/air-canada-td-cibc-visa-offer-to-buy-aimia-s-aeroplan-in-2-25b-deal-1.1113562
Title: Re: AIM.TO - Aimia
Post by: petec on July 25, 2018, 06:26:13 AM
I always felt an AC buy was a distinct possibility - I'm just amazed it's legal. Isn't there a risk that someone sues them for cutting the contract and then buying the company? I guess not since the contract was expiring but it amazes me.
Title: Re: AIM.TO - Aimia
Post by: Cardboard on July 25, 2018, 07:10:30 AM
To me it shows how incompetent Air Canada truly is: spend money on creating your own plan, erode the existing brand, create significant uncertainty around it and then buy it out...

Maybe that they saved some money doing it this way instead of a properly negotiated sale but, I believe that the costs and lost credibility outweigh these benefits.

Cardboard
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on July 25, 2018, 07:26:32 AM
To me it shows how incompetent Air Canada truly is: spend money on creating your own plan, erode the existing brand, create significant uncertainty around it and then buy it out...

Maybe that they saved some money doing it this way instead of a properly negotiated sale but, I believe that the costs and lost credibility outweigh these benefits.

Cardboard



Sure, that's one possibility.  The other possibility is that AIM's management team was arrogant and intransigent during the months and years leading up to AC's announcement, and perhaps at the time AC viewed a deal as unrealistic.

I'd say the story is probably fascinating, but chances are we'll never know how this bizarre set of circumstances came to be.


SJ
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 25, 2018, 07:29:24 AM
Agree that the cut-throat competition went too far. It seems to be a bad case of who would blink first. Likely to be net value destruction in the end.

Surprised by the offer as I thought that reconciliation had reached a breaking point. From an outsider, the offer is relatively low but, if I were a stakeholder, I would hope for some negotiation. However the offer, as is, IMO, would be a relatively good outcome.

Will be interesting to follow because the offer is unsolicited and involves only the Canadian Aeroplan sub. Many outcomes possible. If the present offer goes through, Aimia would then continue its liquidation scenario. Interesting because, in a conceptual way, reward points accumulators are ranking above the prefs.

https://aircanada.mediaroom.com/index.php?s=22103&item=138439
Title: Re: AIM.TO - Aimia
Post by: bathtime on July 25, 2018, 07:34:37 AM
https://www.valuewalk.com/2018/07/mittleman-investment-management-investment-commentary-2q18/

Mittleman's Q218 Letter published yesterday prior to the bid:

We discussed Aimia (AIM CN) at length in our Q1 Investment Review, as it was the biggest detractor from that quarter’s performance. Our two director nominees (Jeremy Rabe and Phil Mittleman) were affirmed to the Board at the company’s annual general meeting of shareholders on April 27th. On May 8th, Jeremy Rabe was named President and Chief Executive Officer, replacing David Johnston, who exited shortly after our nominees joined the board. Jeremy was the founding CEO and a member of the Board of Directors of Aimia’s 49% owned JV with Aeromexico, Premier Loyalty & Marketing, and was responsible for the management of Club Premier, Mexico's leading coalition loyalty program, from its inception in 2010 through 2014, a period of outstanding growth. He was most recently an Operating Partner with Advent International, a leading global private equity firm where he provided strategic support to portfolio companies including LifeMiles, the loyalty program of Avianca. We are pleased with the recent progress made at the Board and management level and are optimistic that further evidence of success will be forthcoming. Aimia remains one of the most exciting investment opportunities in the public markets today. Our sum of the parts valuation is C$10.00 (USD 7.50), which is 4.25x the quarter-end price:

Aeroplan (Canada): ownership (100%), estimated min. fair value = C$1B, 10x C$100M EBITDA post 2020 = C$6.57 per share (we ignore the C$2B miles redemption liability for purpose of enterprise valuation, as airlines don’t charge frequent flier liabilities to EV in their M&A transactions, viewing it as an ongoing negative working capital benefit as long as business is a going concern, and a substantially reduced cash cost in a liquidation / run-off scenario which we view as extremely unlikely.) Aeroplan likely has strategic value well above our C$1B minimum estimate in that its 5M members and its key commercial contracts occupy a critical role at the nexus of a very valuable ecosystem involving TD Bank, CIBC, Visa, Amex Canada, and Air Canada, which have hundreds of millions of annual profits at stake in preserving it.

PLM Premier (Mexico): ownership (48.9%), est. fair value = US$489M, 10x US$100M EBITDA est. 2019 = US$3.21 per share 5.3M members in fast growing coalition loyalty program anchored by Aeromexico, Mexico’s flagship airline. Aimia invested US$124M for a 48.9% stake between 2010-2012, and since then received US$84M in cash dividends. At last financing round in 2012, PLM total enterprise was valued at US$518M, and it has grown substantially since then. Comps are Smiles Fidelidade S.A. (SMLS3 BZ) and Multiplus S.A. (MPLU3 BZ) and trade at 8x to 6x EBITDA recently, down sharply in emerging market sell-off, but fair value likely closer to 10x EBITDA for both.

Cardlytics (CDLX): ownership (2.978M shares), price on 6/30/18= $21.76 = USD 65M = US$0.43 per share

Think BIG Digital – Air Asia: ownership (20%), estimated fair value = USD 50M, US$3 x 16M members = US$0.33 per share

Air Miles Middle East (U.A.E.): ownership (100%), estimated fair value = 0, 1.4M members

Fractal Analytics (NJ, USA): ownership (5%), est. fair value = US$18M (5% of $360M (6x $60M sales) = US$0.12 per share

Assets (excluding cash) = C$1.817B = C$11.93 / US$9.07 per share

(+ cash & bonds C$500M – C$45M working cap. need– C$329M debt – C$43M pension deficit – C$323M preferred – C$34M accrued interest) = -C$274M

NAV: = C$1.543B / US$1.157B / 152.3M shares = C$10.13 / US$7.60 per share (CAD/USD = 1.31 as of 6/30/18)
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on July 25, 2018, 07:54:29 AM
If that's their true opinion of the value, I wonder if they'd prefer to go it alone.

You have to think having CIBC and TD on board the bid pressure Aimia to accept, or at least negotiate.

That said, presumably AC made this offer to the Aimia board before making it publicly, and it obviously wasn't accepted, so AC has decided to negotiate in public.
Title: Re: AIM.TO - Aimia
Post by: bathtime on July 25, 2018, 07:56:40 AM
Mittleman own 18% of Aimia, and Aimia's new CEO Jeremy Rabe (skilled operator in the loyalty arena) was appointed to the board this spring by Mittleman before taking over as CEO shortly after.

So clearly Mittleman won't like the valuation of this offer and will clearly see it as a lowball offer. Will be interesting to see how this unfolds.

The offer expires August 2nd which is a day before earnings August 3rd. Interesting that the bidding party would have insider access to a view into redemptions for this quarter. I wonder how that might that have affected the timing of their bid.

This has been my third largest position. I'm considering that my best option is to hold the shares for now.
Title: Re: AIM.TO - Aimia
Post by: petec on July 25, 2018, 08:55:02 AM
This has been my third largest position. I'm considering that my best option is to hold the shares for now.

Well done you. I'm regretting selling my prefs at a small gain but you can't win them all.
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on July 25, 2018, 10:16:19 AM
i think this is a very good risk reward as the bid for Aeroplan is likely to be increased.

Aeroplan has 5 million members.  A $250M bid implies a value of $50 per member.

it costs WAY more than that for banks etc to get new credit card users, and that is just to get them to sign up.  then you have to get them to actually use the card, which will be a high hurdle since Aeroplan will still be running in 2020 in some form w/ redemption options at many airlines including Air Canada, and nobody likes to leave old miles stranded, and nobody likes to go through and change the autopayments stuff they have set on their existing credit card.

google around a bit and you will see estimates of anywhere from $250-$1000 per card for acquisition costs.  That includes advertising (cost per click etc) as well as the cost of the signup bonus, which is often miles.  Clearly in this case the cost of signup bonus will be lower b/c miles wont be purchased at market rates, and even advertising costs will be lower b/c they can just have stewardesses walk the aisles of their flights with sign up info etc. 

at the same time, that $250-$1000 estimate does not include having to build out the technology to run the program, and the people to run it.

It also does not include the value that comes with having a record of past purchasing behavior, which can help you price flights appropriately going forward.

it also does not include whatever reputational damage can be avoided by just keeping aeroplan members happy and loyal to air canada rather than making them jump through hoops etc.

All in all, $50 per member is very very low, and it is not hard to guestimate that the number should be much much higher even after figuring the lower cost of signup bonuses etc.

My bet is that Aimia will come back and say it is too low, the bid will be raised, and ultimately accepted.  I don't think they will get Mittleman's estimate of $1B, but Mittleman bros have had a tough run in recent years, and would likely be happy with something in between $250M and $1B.  even if it is only $350M (super low $70 customer acquisition cost) that is an additional 20% upside from here, and air canada would be crazy to not just buy this customer list rather than trying to build their own.  They could pay $500 and still come way way way ahead of their own estimate of a $2.5B net present value of their own loyalty program that they haven't even built yet.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 25, 2018, 11:47:08 AM
i think this is a very good risk reward as the bid for Aeroplan is likely to be increased.

Aeroplan has 5 million members.  A $250M bid implies a value of $50 per member.

So there is progress but the story continues to be an attempt at a compromise between 2 very different assessments.
1-The assessment made by Air Canada, as anchor partner.
2-The assessment made by those who think that Aimia has a profitable operating future without an anchor airline partner.
My valuation range has always been much closer to 1-

Homestead,
In your evaluation, why do you take the $250M amount and not enterprise value ($2,25B) to derive your acquisition cost measure?

This is work in progress but isn't it interesting that the point liabilities assumed (deferred revenue) by AC under present circumstances would correspond only to about 2/3 of deferred revenue recognized in the Aeroplan program? Looking back at what happened to Nectar and trying to figure out the accounting (and cash flow) implications for the Aeroplan program and Aimia, I estimate that, if that's part of the negotiations, if AC eventually assumes the other 1/3 of redemption liability, that would require Aimia to transfer about $600M (estimated redemption cost) to Air Canada as a related cash coverage transfer. So, I agree with bizaro86 that the "go it alone" option is still alive.

Another message I get from the press release is that TD, CIBC and Visa may very well follow the loyalty program (whatever it is) that has Air Canada as an anchor partner.

Negotiations are likely but I still see AC having the upper hand and, to me, this has implications for valuation along the capital structure.

@Petec if you made it this far:
Say you were still holding prefs this AM, what would you do with the new info?

@bathtime
Holding shares makes sense because there is value in Aimia that is not reflected in presently quoted market cap. The problem I've always had here is that I could never really put a price tag on the value destruction that would occur. Maybe Mr. Mittleman and Mr. Rovinescu can make a satisfactory deal but I don't know enough about the two personalities to commit capital here. Good luck (sincerely).
Title: Re: AIM.TO - Aimia
Post by: ulysses02 on July 25, 2018, 11:59:40 AM
i think this is a very good risk reward as the bid for Aeroplan is likely to be increased.

Aeroplan has 5 million members.  A $250M bid implies a value of $50 per member.

So there is progress but the story continues to be an attempt at a compromise between 2 very different assessments.
1-The assessment made by Air Canada, as anchor partner.
2-The assessment made by those who think that Aimia has a profitable operating future without an anchor airline partner.
My valuation range has always been much closer to 1-

Homestead,
In your evaluation, why do you take the $250M amount and not enterprise value ($2,25B) to derive your acquisition cost measure?

This is work in progress but isn't it interesting that the point liabilities assumed (deferred revenue) by AC under present circumstances would correspond only to about 2/3 of deferred revenue recognized in the Aeroplan program? Looking back at what happened to Nectar and trying to figure out the accounting (and cash flow) implications for the Aeroplan program and Aimia, I estimate that, if that's part of the negotiations, if AC eventually assumes the other 1/3 of redemption liability, that would require Aimia to transfer about $600M (estimated redemption cost) to Air Canada as a related cash coverage transfer. So, I agree with bizaro86 that the "go it alone" option is still alive.

Another message I get from the press release is that TD, CIBC and Visa may very well follow the loyalty program (whatever it is) that has Air Canada as an anchor partner.

Negotiations are likely but I still see AC having the upper hand and, to me, this has implications for valuation along the capital structure.

@Petec if you made it this far:
Say you were still holding prefs this AM, what would you do with the new info?

@bathtime
Holding shares makes sense because there is value in Aimia that is not reflected in presently quoted market cap. The problem I've always had here is that I could never really put a price tag on the value destruction that would occur. Maybe Mr. Mittleman and Mr. Rovinescu can make a satisfactory deal but I don't know enough about the two personalities to commit capital here. Good luck (sincerely).

$2.25B would be suggesting that acquirer is "paying" for the redemption cost liability which is merely deferred revenue that is only immediately due under very specific circumstances e.g. run-off or potentially, receivership. It may make sense, however, to attach the ~$350M net debt figure to the Aeroplan offer equity value, so EV of $600M against 5M member, or $120 per member, which is still cheap.   
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on July 25, 2018, 12:31:57 PM
You should at least include a present value of the miles earned in the acquisition figure. Those miles will get redeemed for something of value at some point, and any acquirer will have to pay for that something of value somehow.

Also, is your assumption that: number of members == number of credit card accounts, or is that the number of active credit card accounts?

I only ask because members will be much larger than credit cards for a few reasons. I'm an aeroplan member, as is my wife, as are my children. My pre-school aged children aren't good candidates for marketing credit cards. I have an inactive TD one that I cancelled a couple of years ago (signed up for bonus). They have been sending me statements marked "inactive" for years inviting me to call to reactivate. I haven't used it or paid a fee in that time, so I doubt I have much value as a customer there. My wife has a cash back card and no interest in an aeroplan card whatsoever, but just redeems miles earned from flying.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 25, 2018, 12:46:19 PM
You should at least include a present value of the miles earned in the acquisition figure. Those miles will get redeemed for something of value at some point, and any acquirer will have to pay for that something of value somehow.

Agree that there is a time value and, even if the deferred revenue has a built-in accounting profit part, over time recognizing deferred revenue has a negative cash flow component.

Also, like Mr. Mittleman describes, it is "normal" for loyalty businesses to record deferred revenue and it is OK to associate this concept with negative working capital requirements, but the underlying assumption implies that not only there is going concern but also that the business generating points will continue at comparable or better levels (otherwise the potential negative cashflow implications are very real). I think that it is fair to assume that Aeroplan with Air Canada meets that definition versus the uncertainty of Aeroplan continuing without an airline anchor partner. I don't think that deferred revenue has zero value in Aimia's present context. There is a range of value depending on the perspective.

So, the interesting part IMO is that the value of this liability is lower for Air Canada as a potential acquirer of Aimia versus for Aimia as a stand-alone entity. Potential area for negotiation.

Also, I understand that AC does not intend to assume Aimia's debt from today's press release.
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on July 26, 2018, 06:17:13 AM
i think this is a very good risk reward as the bid for Aeroplan is likely to be increased.

Aeroplan has 5 million members.  A $250M bid implies a value of $50 per member.



Homestead,
In your evaluation, why do you take the $250M amount and not enterprise value ($2,25B) to derive your acquisition cost measure?



short answer, i agree with mittleman's points.  industry standard in M&A is to not count the liability.

longer answer is more complicated and ephemeral, but basically, the $2B is a GAAP liability, but to an airline, it is more of an asset.  planes fly whether they are full or not.  for an airline, there is essentially zero dollar cost to redeem the miles. they may have an accounting book entry for the "cost" of the miles, and  if you want to split hairs, the dollar cost is an extra bag of peanuts and a thimble full of jet fuel....  but the key takeaway is that b/c the cost of flying the plane is fixed, there is zero dollar cost to having another body on board. 

the asset is that if you get an extra person on a plane b/c they used their miles, and then they feel good about your airline and are more likely to fly with you again, that has value. that is why it is called a loyalty program.  there is also (small) value if they are on your plane and buy a drink and a sandwich or whatever.  its not worth putting a dollar number on that, but the real cost is certainly zero b/c the airline is flying that plane one way or another.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 26, 2018, 06:39:00 AM
Homestead,
In your evaluation, why do you take the $250M amount and not enterprise value ($2,25B) to derive your acquisition cost measure?

short answer, i agree with mittleman's points.  industry standard in M&A is to not count the liability.

longer answer is more complicated and ephemeral, but basically, the $2B is a GAAP liability, but to an airline, it is more of an asset.  planes fly whether they are full or not.  for an airline, there is essentially zero dollar cost to redeem the miles. they may have an accounting book entry for the "cost" of the miles, and  if you want to split hairs, the dollar cost is an extra bag of peanuts and a thimble full of jet fuel....  but the key takeaway is that b/c the cost of flying the plane is fixed, there is zero dollar cost to having another body on board. 

the asset is that if you get an extra person on a plane b/c they used their miles, and then they feel good about your airline and are more likely to fly with you again, that has value. that is why it is called a loyalty program.  there is also (small) value if they are on your plane and buy a drink and a sandwich or whatever.  its not worth putting a dollar number on that, but the real cost is certainly zero b/c the airline is flying that plane one way or another.
[/quote]

Thank you. Still, with the perspective you describe, one needs to assume a perfect match between would-have-been-empty seats and tickets sold through the reward channel.

It's always challenging to value liabilities in a distress scenario and now vultures are circling:
https://www.prnewswire.com/news-releases/grupo-aeromexico-announces-offer-to-acquire-aimias-stake-in-plm-300687112.html

"It merits mentioning that Aeromexico has informed Aimia that the current contract between PLM and Grupo Aeromexico ("Aeromexico"), that establishes the basis of operation for the loyalty program Club Premier, will not be extended beyond its current expiration date.

Given the long-term intention of Aeromexico to take full control of its loyalty program, Aeromexico does not consider an IPO of PLM as an acceptable option. For this reason it is Aeromexico's view that the best long term solution for all stakeholders is for Aeromexico to acquire the equity stake currently held by Aimia."

It's hard not to see this choreography as a concerted effort to go for the jugular.
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on July 26, 2018, 07:05:37 AM
i think this is a very good risk reward as the bid for Aeroplan is likely to be increased.

Aeroplan has 5 million members.  A $250M bid implies a value of $50 per member.



Homestead,
In your evaluation, why do you take the $250M amount and not enterprise value ($2,25B) to derive your acquisition cost measure?



short answer, i agree with mittleman's points.  industry standard in M&A is to not count the liability.

longer answer is more complicated and ephemeral, but basically, the $2B is a GAAP liability, but to an airline, it is more of an asset.  planes fly whether they are full or not.  for an airline, there is essentially zero dollar cost to redeem the miles. they may have an accounting book entry for the "cost" of the miles, and  if you want to split hairs, the dollar cost is an extra bag of peanuts and a thimble full of jet fuel....  but the key takeaway is that b/c the cost of flying the plane is fixed, there is zero dollar cost to having another body on board. 

the asset is that if you get an extra person on a plane b/c they used their miles, and then they feel good about your airline and are more likely to fly with you again, that has value. that is why it is called a loyalty program.  there is also (small) value if they are on your plane and buy a drink and a sandwich or whatever.  its not worth putting a dollar number on that, but the real cost is certainly zero b/c the airline is flying that plane one way or another.



Well, the short answer is fine as long as your loyalty program remains a going concern.  Annual redemptions are offset by issuance of points/miles and the accumulated reward liability is largely irrelevant.  But that's only true if the program is viable for the foreseeable future and a bulk of its participants don't collectively decide to rush to the exits.  When AC made its announcement last summer, the viability of Aeroplan as a going concern became a real question.  We've already seen an uptick in net-redemptions, but so far it hasn't been catastrophic.

The longer answer doesn't hold water for me.  With Aeroplan, people are not booking empty seats at the last minute, they usually book them well in advance -- in fact, that's one of participants' biggest beefs with the program, that they need to book their tickets six months in advance to get a reward booking.  Further, AC's flights rarely have empty seats these days (in my experience this is also true of UA and Lufthansa -- they are doing a much better job of managing their load and pricing their seats to fill the planes).  An Aeroplan seat is not a "freebie" for an airline, but rather a seat that they can no longer sell to a cash paying customer.  I would, however, fully buy your argument if AC and other airlines used their FF programs to fill the last few seats on a plane at the last minute, but that's just not how it works.

The stink-bid from AC is a lifeline for AIM shareholders and it's a lifeline for Aeroplan program participants.  If the takeover fails and AC ultimately does elect to start its own FF program, you can expect a bulk of customers to migrate away from Aeroplan toward the new Star Alliance eligible program.  If they all try to redeem their existing Aeropesos after migrating, then that reward liability becomes real.


SJ
Title: Re: AIM.TO - Aimia
Post by: mcliu on July 26, 2018, 07:50:16 AM
I don't see why they would increase the bid for Aeroplan. There's no other logical buyer. The value of Aeroplan is 0 or negative if it continues under Aimia. $250M seems generous..
Title: Re: AIM.TO - Aimia
Post by: bathtime on July 26, 2018, 08:43:17 AM
https://business.financialpost.com/pmn/business-pmn/grupo-aeromexico-makes-us180-million-offer-to-buy-aimias-stake-in-plm

"Grupo Aeromexico makes US$180 million offer to buy Aimia's stake in PLM."

Mittleman:

"PLM Premier (Mexico): ownership (48.9%), est. fair value = US$489M, 10x US$100M EBITDA est. 2019 = US$3.21 per share 5.3M members in fast growing coalition loyalty program anchored by Aeromexico, Mexico’s flagship airline.
Aimia invested US$124M for a 48.9% stake between 2010-2012, and since then received US$84M in cash dividends.
At last financing round in 2012, PLM total enterprise was valued at US$518M, and it has grown substantially since then. Comps are Smiles Fidelidade S.A. (SMLS3 BZ) and Multiplus S.A. (MPLU3 BZ) and trade at 8x to 6x EBITDA recently, down sharply in emerging market sell-off, but fair value likely closer to 10x EBITDA for both."

Mittleman as a board member already would have known about the Air Canada approach before his Q2 Letter was released detailing his sum of the parts.

What Air Canada hadn't planned for is that a value activist like Mittleman would be able to obtain not only board representation but install a highly reputable CEO from the industry which then will have made Aimia's viability as a going concern and as a potentially strong competitor beyond 2020 much more realistic.

See Rabe video, he's a creative and skilled leader, whereas former CEO was incompetent: https://www.youtube.com/watch?v=YO8HB1iwUvQ



Title: Re: AIM.TO - Aimia
Post by: CleverLongboat on July 26, 2018, 09:22:53 AM
I don't know what the market is pricing in here but a relatively simple NAV using the Air Canada and Aero Mexico bid and subtracting debt and prefs gets me to about $1.00CAD in value per share. Why are Aimia and the prefs up so much? If anything like that comes to pass, shareholders might end up fighting pref holders for liquidation value...
Title: Re: AIM.TO - Aimia
Post by: clutch on July 26, 2018, 09:36:59 AM
I don't know what the market is pricing in here but a relatively simple NAV using the Air Canada and Aero Mexico bid and subtracting debt and prefs gets me to about $1.00CAD in value per share. Why are Aimia and the prefs up so much? If anything like that comes to pass, shareholders might end up fighting pref holders for liquidation value...

https://business.financialpost.com/news/fp-street/air-canada-td-bank-cibc-visa-offer-to-buy-aimia-aero

Quote
Air Canada’s bidding group, which also includes Toronto-Dominion Bank and Canadian Imperial Bank of Commerce as well as Visa’s Canada unit, said in a statement it would also assume the liability of about $2 billion in Aeroplan points. The offer implies an estimated market value of $3.64 per Aimia share, a 46 per cent premium to its closing price of $2.50 Tuesday, the bidders said.
Title: Re: AIM.TO - Aimia
Post by: CleverLongboat on July 26, 2018, 09:51:14 AM
Yeah but the asset side of the balance sheet is full of intangibles that go away with Aeroplan etc.
Here is what I'm approximately getting assuming liquidation and current bids go through as is:
Liquidation Value   
Cash   272
Restricted Cash   16
Short & LT term Investments   275
Prepaid expenses   29
Property   18
Think Big   60
Cardlytics   60
Aeroplan   250
PLM   235
Assets   1215
AP & Accrued   100
Income Taxes   14
LTD   350
Pension   100
Deferred Income Tax   93
Preferreds   322.5
Corporate Costs for 2 years   120
Liabilities   1099.5
Equity   115.5
Shares   152
Value/Share   0.76
Title: Re: AIM.TO - Aimia
Post by: Saj on July 26, 2018, 11:21:20 AM
Yeah but the asset side of the balance sheet is full of intangibles that go away with Aeroplan etc.
Here is what I'm approximately getting assuming liquidation and current bids go through as is:
Liquidation Value   
Cash   272
Restricted Cash   16
Short & LT term Investments   275
Prepaid expenses   29
Property   18
Think Big   60
Cardlytics   60
Aeroplan   250
PLM   235
Assets   1215
AP & Accrued   100
Income Taxes   14
LTD   350
Pension   100
Deferred Income Tax   93
Preferreds   322.5
Corporate Costs for 2 years   120
Liabilities   1099.5
Equity   115.5
Shares   152
Value/Share   0.76

Thanks for sharing.

I view these offers as floors, not ceilings. Aimia has no obligation to sell, particularly in the PLM case, which runs for another dozen years. Perhaps with its own charters or other partners or better offers for these same assets, Aimia can be worth much more. Furthermore, they continue to generate cash while we wait.

I own the prefs, and continue to hold on since IMO these are worth close to face value.

Just my two cents since you asked what the market may be thinking.

Saj
Title: Re: AIM.TO - Aimia
Post by: CleverLongboat on July 26, 2018, 11:37:38 AM
Saj, good points. I agree, especially the value of PLM seems to be up in the air at this point.
Title: Re: AIM.TO - Aimia
Post by: ulysses02 on July 26, 2018, 04:26:24 PM
CleverLongboat -- Aeroplan's bid is a going-concern -- and not a liquidation -- bid at $3.64 per share. They've merely used a SOTP style breakdown in their letter of intent. The value of Aeroplan to Air Canada is the cost savings to building their own program, the increased loyalty and hence turnover on their assets and the share of value of 5M members to coalition partners.

Your NAV breakdown is effectively a liquidation assessment. Any business valued on a liquidation basis would look overpriced relative to an arms-length enterprise value bid..
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on July 26, 2018, 05:12:20 PM
lets also not forget that WestJet has very recently announced a major expansion, as well as a reboot of their own loyalty program. 

If Aimia were to go belly up, Air Canada must realize that there is a very real risk that they won't simply pick up the pieces... WestJet will be fighting for them tooth and nail.  Air Canada would be crazy if they took on all of the cost of acquiring customers (head to head vs WestJet), all of the operational risk of building something that works, and all of the time (a few years) required to build something new when WestJet is looking to poach customers now.

air canada has plenty of room to the upside on their bid that would STILL cost less and have way less risk than starting from scratch.

The PLM bid is just silly.  The growing dividend stream over the next 12 years is worth more than the bid.

however, PLM smelled blood in the water, and all they need is one shareholder to make noise about demanding a vote etc., and then air canada and aeromexico will wind up stealing the pieces... but at least the theft will occur higher than current prices
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 26, 2018, 06:58:29 PM
air canada has plenty of room to the upside on their bid that would STILL cost less and have way less risk than starting from scratch.

I find it difficult to figure out odds of a compromise here. They seem to be so far apart.

-What do you mean by plenty of room?
My take on the situation is that AC, at this point, will not go much higher.

-Can you or others comment on (if a deal is reached) what would be transferred (or not) on what is remaining in the related items of the Aeroplan subsidiary assets and liabilities (mainly about $560M in cash, ST and LT investments and about $1B in deferred revenue) that need to be considered along the sale of the business?
Aeroplan is not Nectar but I'm asking because this part happened to be significant, in terms of cash flow implications (along working capital adjustments). I wonder if the acquisition of the cash flow generation from now to June 2020 could partially mitigate this component of the transaction?
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on July 26, 2018, 07:35:38 PM
This is interesting. There has been a noticeable improvement in the Aeroplan strategy and communication since the new CEO came on board. Before the messaging was roughly "you'll still be able to get flights"

Now the messaging is "you'll be able to use any airline, the reward chart will be mostly the same, and we're running charters for peak dates that you can't get now to popular destinations, plus you'll be able to transfer to hotel programs"

Way more attractive, and will probably slow the burn to 2020, improving cash-flow in the interim. That, plus customer inertia on the credit card side probably means the going concern value of Aeroplan is more than what Air Canada has offered, especially if you assume they do a few devaluations over time to cut down that big deferred liability.
Title: Re: AIM.TO - Aimia
Post by: petec on July 27, 2018, 02:06:45 AM
@Petec if you made it this far:
Say you were still holding prefs this AM, what would you do with the new info?

I'd have sold them immediately, on three grounds:
1) My original buy thesis was that they were vastly undervalued if AC renewed and probably undervalued if it did not. Making what would have been a >70% profit in the event that AC did not renew, which is what would have happened had I sold recently at $18, would have been a huge and unexpected win.
2) My assessment of intrinsic value was accurate enough to know that $10 was not the right price, but it was not accurate enough to know whether $18 is.
3) These are prefs, not common. Their price is determined by two things: creditworthiness and interest rates. This bid should have laid the creditworthiness worries to rest immediately*. I see no particular reason to see why a higher bid would add value to the prefs (as opposed to the common). So the only reason to hold would be for the income, and on that basis the prefs at $18 look fine to me but not exciting. The only reason to expect another big bump upwards is if the new owners redeem the prefs, but I have no view on how likely that is.

P

*EDIT: this may not be right. I was thinking the bid was for the company, and therefore the prefs would become liabilities of a new entity with a very cash-positive future. But if the bid is just for Aeroplan, then to assess the creditworthiness of the prefs I'd have to redo a SOTP for the remainder of Aimia, which I have not done.
Title: Re: AIM.TO - Aimia
Post by: petec on July 27, 2018, 02:20:20 AM
One other thought on the value of the customers and on customer acquisition costs. We, or at least I, don't know how much data AC and TD have on Aeroplan members. It is possible that Aeroplan runs the points system but that actually the majority of the useful data is available to the partners. I can't believe AC doesn't know who's flying on their planes and TD doesn't know who has their credit cards. That's not to say that Aeroplan doesn't have valuable data, but AC and TD are buying customers that they already have and know. The customer acquisition cost equivalence therefore doesn't hold water for me. The true value is avoiding the cost of rebuilding the platform and the disruption to customers.
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on July 27, 2018, 06:16:40 AM
One other thought on the value of the customers and on customer acquisition costs. We, or at least I, don't know how much data AC and TD have on Aeroplan members. It is possible that Aeroplan runs the points system but that actually the majority of the useful data is available to the partners. I can't believe AC doesn't know who's flying on their planes and TD doesn't know who has their credit cards. That's not to say that Aeroplan doesn't have valuable data, but AC and TD are buying customers that they already have and know. The customer acquisition cost equivalence therefore doesn't hold water for me. The true value is avoiding the cost of rebuilding the platform and the disruption to customers.


AC absolutely does know who is flying on their planes.  But, in a country of 35 million people, there are probably 287 Xiu Li's, 116 Sam Jones's, and 73 Hussein Ali's (we do not have a national identity card system in Canada -- the government can go F itself if it wants us to carry ID on a day-to-day basis).  The nice thing about Aeroplan is that there is a unique identifier number which enables analysis of individuals travel habits, which cannot be done with names alone.  The other nice thing about Aeroplan's granular data is that it tells you what hotels people use, where (and whether) they purchase fuel for their car, and whether they visit particular grocery stores or pharmacies.

The data exists, its granular, and it's worth something.  But how much?


SJ
Title: Re: AIM.TO - Aimia
Post by: bathtime on July 27, 2018, 07:52:49 AM
I wonder what the bolded part is referring to? Air Canada's proposals or other parties?

https://www.aircanada.com/ca/en/aco/home/frequent-flyer/questions.html

Q: Why are you giving Aimia a week to respond? Why can’t you give them more time?
A: As previously announced, Air Canada is launching a new loyalty program in June 2020. In order to do this, we need to define our core program partners well in advance to ensure that we have enough time to build a best in class loyalty program.
What’s more, there have been other proposed transactions to purchase Aimia over the past several months. Given the stability and certainty that this bid ensures for our customers and all Aeroplan members, it’s important and necessary to come to a conclusion on this bid quickly.
Title: Re: AIM.TO - Aimia
Post by: petec on July 27, 2018, 09:18:52 AM

AC absolutely does know who is flying on their planes.  But, in a country of 35 million people, there are probably 287 Xiu Li's, 116 Sam Jones's, and 73 Hussein Ali's (we do not have a national identity card system in Canada -- the government can go F itself if it wants us to carry ID on a day-to-day basis).  The nice thing about Aeroplan is that there is a unique identifier number which enables analysis of individuals travel habits, which cannot be done with names alone.  The other nice thing about Aeroplan's granular data is that it tells you what hotels people use, where (and whether) they purchase fuel for their car, and whether they visit particular grocery stores or pharmacies.

The data exists, its granular, and it's worth something.  But how much?

SJ

Yes, it is worth something. But what I have never been able to figure out is exactly who owns what, data-wise. For example, does AC have the rights to all the data generated by AC and TD to all the data generated by TD? And if so, could they not replicate almost exactly what Aeroplan has by putting their heads together? I don't know the answer to this but these questions have always prevented me from being confident in the value I ascribe to Aeroplan.

Incidentally, in my experience you can't fly without giving your passport number, so there's a unique identifier.
Title: Re: AIM.TO - Aimia
Post by: ulysses02 on July 27, 2018, 11:06:57 AM
however, PLM smelled blood in the water, and all they need is one shareholder to make noise about demanding a vote etc., and then air canada and aeromexico will wind up stealing the pieces... but at least the theft will occur higher than current prices

Canadian takeover law requires 2/3 vote for an court-arranged (friendly) offer and 90% tender acceptance for a tender/takeover to completed. This is similar to most other Commonwealth M&A law (UK, Australia etc) i.e. doesn't unfairly overweight or underweight minority or majority investors. In this case, Burgundy and the Mittlemans own ~30% of AIM stock, so Air Canada's offer seems more like a starting bid than a serious tactic that would engender successful shareholder revolt.

Aeromexico's (Delta Airlines') offer on the other hand... no idea what they're thinking. In a fantastic scenario, they could withhold dividend payments from PLM for the next 12 years and then force a (discounted) redemptions run large enough to wipe out 2030's accumulated cash & assets, thus wiping out equity in a bankruptcy. So, that would mean they avoid paying an additional $200-$300M in fair value today for what upside/downside?
Upside: get the remaining 49% of PLM for "free" (assuming Aeromexico is PLM's largest creditor in the hypothetical bankruptcy).
Downside: risk damaging the brand (negative publicity of a redemption run) which at that point would be a major contributor to Aeromexico's economics, lawsuits etc.

Any other thoughts on the logic of Aeromexico's offer (aside from the "vultures-circling" point that's been made)?
 
Title: Re: AIM.TO - Aimia
Post by: sculpin on July 27, 2018, 11:24:00 AM
The bullish view on Aimia...

http://adventuresincapitalism.com/2018/07/27/air-canada-screwed/
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 27, 2018, 11:54:54 AM
Any other thoughts on the logic of Aeromexico's offer (aside from the "vultures-circling" point that's been made)?

The loyalty units that are pure frequent flyer programs are usually developed and kept as fully consolidated subsidiaries because they are profit centers. If you look at the airline industry, a significant amount of profit reported is from those programs.

Sometimes, like when ACE had to divest their frequent flyer program, which eventually became Aimia (loyalty coalition), financial distress was the factor behind the decision.

For Aeromexico (in 2010-2, Delta (with their SkyMiles) was not really in the picture), the frequent flyer program that they had developed did not seem to be particularly profitable and they saw an opportunity in Mexico to develop a loyalty coalition but did not have the expertise, so they needed a partner. They teamed up with Aimia and formed a legal structure that reflected the operating conditions then. The program has been quite successful and is up and running and Aeromexico probably determined that it would be best to try to opportunistically take the program completely in-house. I think they will maintain it and try to grow it but will try to buy back the minority partner whenever possible, paying the least possible, before 2030.

I think Aimia reached a good deal when they formed PLM but the only strategic buyer is the majority owner which diminishes their bargaining position in the interim. They could just hold on if they don't need the cash.

If you think the long term prospects for Mexico are good (middle class growing, more people flying etc) and realize that, unlike the Canadian market which is unusually crowded in the loyalty coalition space, as far as I know, Club Premier is the predominant loyalty player in its market, the future of this unit looks quite promising.
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on July 27, 2018, 01:22:04 PM
Incidentally, in my experience you can't fly without giving your passport number, so there's a unique identifier.


Nope, not needed for a domestic flight within Canada -- your name is good enough to book the ticket, and then you can show your driver's permit or other government issued photo ID at the gate.  Definitely needed for an international flight.


SJ
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on August 02, 2018, 11:10:09 AM
This is getting yet more interesting.  AIM is trying to negotiate with the One World alliance to find a partner for after AC's departure.  If that can actually be negotiated, that would be progress for program participants, but it still leaves a Canadian frequent flyer program without a domestic airline partner.

https://www.bloomberg.com/news/articles/2018-08-02/aimia-in-talks-with-oneworld-as-air-canada-deadline-looms


Time to bust out the popcorn!


SJ
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 02, 2018, 12:05:14 PM
I think the banks (credit card partners) are the ones who will either make or break this deal (TD/CIBC).  They have a lot to lose if there is no agreement.  I would not be surprised if they kick in something in order to raise the offer from the Air Canada consortium.

Leaking the OneWorld negotiations is a good negotiating tactic but its not relevant to what happens next.  I'm expecting an extension in negotiations and a raised offer but WDIK.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: SnarkyPuppy on August 02, 2018, 06:13:50 PM
https://www.newswire.ca/news-releases/update-on-discussions-with-current-partners-regarding-conditional-acquisition-of-aeroplan-business-689938021.html

-Original offer upped to $325mm.
-Amia countering with $450mm.   

Seems low considering Mittleman valuing it at $1bn in SOTP
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 02, 2018, 06:49:06 PM
Quote
Seems low considering Mittleman valuing it at $1bn in SOTP

It depends on the other terms of the deal and how they handle the transition as it will affect cash flows during the transition back to AC and its consortium through 2020.  As of now though, they have no deal - unless the negotiations get extended.

AIM releases its Q2 earnings tomorrow am.  I'm sure we'll hear more on the current state of play from the new CEO on the CC.

wabuffo

Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 03, 2018, 05:19:44 AM
Case study in the making.
IMO the divorce is official and AC will come back to the table only if they can offer less.

This investment rests now on the risk/reward of the transformation with AC lining up as a competitor.


The last Q2 results:

PLM continues to do very well

Q1:
Numbers for the core Aeroplan coalition program:

Accumulation activity (YoY variance, %):  2017    Q1:5,4   Q2:1,2   Q3:2,0   Q4:(0,9)      2018     Q1:(2,8)    Q2:(4,9)
Redemption activity   (YoY variance, %):  2017    Q1:3,9   Q2:1,8   Q3:4,7   Q4:9,9         2018     Q1:9,6       Q2:7,7

Can Aimia survive?
Aimia assumes decreasing redemption pressure going forward which appears to be optimistic.
They present their data rather well and one can reasonably make cash flow scenarios.
I would say they are likely to survive.

Can Aimia thrive (post June 2020)?
Interestingly, I find the new team more competent and that increases both the reward and risk profile.
Too hard for me and it will take a while to find out.
I see too many falling knifes.

This investment has definitely made it out of my circle. Good luck to the longs (common and preferred).
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on August 03, 2018, 07:01:41 AM
Case study in the making.
IMO the divorce is official and AC will come back to the table only if they can offer less.

This investment rests now on the risk/reward of the transformation with AC lining up as a competitor.


The last Q2 results:

PLM continues to do very well

Q1:
Numbers for the core Aeroplan coalition program:

Accumulation activity (YoY variance, %):  2017    Q1:5,4   Q2:1,2   Q3:2,0   Q4:(0,9)      2018     Q1:(2,8)    Q2:(4,9)
Redemption activity   (YoY variance, %):  2017    Q1:3,9   Q2:1,8   Q3:4,7   Q4:9,9         2018     Q1:9,6       Q2:7,7

Can Aimia survive?
Aimia assumes decreasing redemption pressure going forward which appears to be optimistic.
They present their data rather well and one can reasonably make cash flow scenarios.
I would say they are likely to survive.

Can Aimia thrive (post June 2020)?
Interestingly, I find the new team more competent and that increases both the reward and risk profile.
Too hard for me and it will take a while to find out.
I see too many falling knifes.

This investment has definitely made it out of my circle. Good luck to the longs (common and preferred).



A few observations:


1) Cash and debt are dreadfully similar.  AIM must repay its notes next year, and I have already questioned the likelihood of its revolver being renewed.  If that actual cash debt needs to be repaid and new debt cannot be floated, they'll have about CAD$200 of cash available.

2) The Burn-to-earn ratio of Aeroplan has turned unfavourable.  You have noted that the company inexplicably forecasts that this will stop in Q3 and subsequent quarters, but I don't quite understand how.  Some program participants are heading for the exits and burning their miles, while the credit card companies have significantly reduced their promotional credit card sign-up campaigns.  The trend is not good, and I don't understand why it would get better in Q3, especially since a large portion of the credit cards are issued by two of the banks making an offer to buy Aeroplan -- presumably any new promotional campaign would be contingent on a successful bid.

Is the burn-to-earn ratio near the tipping point where AIM goes cash-flow negative?  If they can't arrive at a deal with the AC consortium, this looks like a real dog.


SJ
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on August 03, 2018, 07:37:32 AM
They've announced they're going with Porter post 2020, which I think takes a deal with AC off the table.

Porter has very few vacation type destinations, and nor presence in the west. This feels like a mistake to me...
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on August 03, 2018, 08:12:57 AM
They've announced they're going with Porter post 2020, which I think takes a deal with AC off the table.

Porter has very few vacation type destinations, and nor presence in the west. This feels like a mistake to me...


My sense is also that this is a mistake.  If your only flying activity is Billy Bishop to Trudeau airport, you might be happy with this arrangement, but everybody else will need to join AC's new FF program. 

Perhaps there's some weasel language in their deal with Porter than will enable them to continue negotiating with the AC consortium?


SJ
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on August 03, 2018, 08:19:40 AM
If they're just using Porter to try and leverage a better deal from AC that's one thing, although that isn't what it sounded like to me. Of course, who knows what the actual contract says.

I think the AC deal on the table is better than a standalone Aeroplan with Porter as the main partner.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 03, 2018, 08:33:14 AM
Quote
If that actual cash debt needs to be repaid and new debt cannot be floated, they'll have about CAD$200 of cash available.

The business is still generating cash every Q and they have many levers they can pull.  In addition to the cash on hand of $248m, they have $260m of bonds, and/or they can sell their stake in CDLX worth $70m.  Plus the business will generate $120m-$150m in cash between now and end of Q2, 2019.   As long as they continue to strand the preferreds, they will be fine while they work through the transition into the post-Air Canada world in 2020.

Quote
Is the burn-to-earn ratio near the tipping point where AIM goes cash-flow negative? 

I think these loyalty programs are really sticky.  Most of the points/billings come from credit card spend (TD/CIBC/AMEX) and as long as these cards are the consumers' primary credit card - they're kind of on autopilot and people don't think about the points or switching their cards.   It's the banks that have the most to lose here, if Air Canada doesn't make a deal with AIM and selects new bank partners for its new frequent flyer program.  Even then, there's a lot of inertia before people will switch cards. 

Look at the Air Miles fiasco a few years ago when the Air Miles program started to cancel points.  There was a two-quarter "run on the bank" but after Air Miles reversed its policy, everything went back to normal and Air Miles has seen no impact on its business.  As long as AIMIA doesn't cancel points outright by putting a time limit on using them, their liability will be very stable and its a Blue Chips stamps kind of liability with very high breakage over time.

Quote
If they can't arrive at a deal with the AC consortium, this looks like a real dog.

Well, if you listen to today's CC, you'll understand that AC's offer of $250m was a gross cash offer, and after onerous deal conditions were factored in, the net cash to AIM was a lot lower.  That's the part we don't have details on.  The cash part is the tip of the iceberg and the factors like working capital adjustments, mileage liability assumptions, breakage, which employees go with the deal, who assumes pension obligations for transferred employees, whether redemption contingency cash is transferred to AC or stays with AIMIA can swing the economics from cash positive to cash negative (ie, AIM has to pay AC to take Aeroplan).

I think AIM is fine because I think it will cost AC and the banks more than it will cost AIM if the deal breaks as their profit pools are bigger.  But that's what makes a market.

I do think the new CEO is terrific and "gets it".  Unfortunately, it looks like he's getting pressured hard by the lenders and the preferred holders who are absolutely panicking.  He also apparently is getting a lot of grief from major shareholders about the "lowball" $450m offer in the p-r.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 03, 2018, 08:44:49 AM
Quote
My sense is also that this is a mistake.  If your only flying activity is Billy Bishop to Trudeau airport, you might be happy with this arrangement, but everybody else will need to join AC's new FF program. 
That's not what AIM is doing.  After 2020, they can and will buy seats on any airline -- including Air Canada.  That's why they are negotiating with OneWorld as well (American, British Airways, etc).   They're setting up for the post 2020 agreement termination. 

Yes, the frequent flyers may switch, but only a few have loyalty credit cards and they make only 17-18% of gross billings.  The key is frequent spenders (TD/CIBC/AMEX loyalty card users) who just want to fly when they want to fly.  AIMIA would still 'buy' seats on Air Canada at market rates (less a volume discount).  But AIM's buying power via credit cards would be 3x-4x AC's frequent flyer program and would lead to AIMIA steering flyers to OneWorld airlines/Porter.  These airlines would add capacity to Canadian cities since 8-10% of AC seat's belong to AIM today.  That's a lot of new planes on Canadian routes and a nightmare scenario for Air Canada.

If this threat becomes credible enough, Air Canada will have to come back to the table.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on August 03, 2018, 09:52:56 AM
Quote
If that actual cash debt needs to be repaid and new debt cannot be floated, they'll have about CAD$200 of cash available.

The business is still generating cash every Q and they have many levers they can pull.  In addition to the cash on hand of $248m, they have $260m of bonds, and/or they can sell their stake in CDLX worth $70m.  Plus the business will generate $120m-$150m in cash between now and end of Q2, 2019.   As long as they continue to strand the preferreds, they will be fine while they work through the transition into the post-Air Canada world in 2020.


Ignore the bonds and instead think in aggregate.  Total cash and investments is $531m and total cash debt is $329.8m (the notes and revolver) and all cash debt is due within two years if it cannot be extended/renewed.  Hence, they have at the moment about $200m in cash available on the balance sheet if you are a pessimist like me and believe that they will not be able to float new notes or renew their revolver.

The cash flow thing is interesting.  FCF for the quarter was ~$20m.  If you are brave, you might run-rate that over a year, but as I questioned, how much more deterioration in the burn-to-earn ratio would be required to drive FCF to zero (or negative)?  So far, the burn-to-earn for the past three quarters has been pretty grim.  I'm not sure that I would rush to pencil in $120-150m of cash generation between now and the end of Q2 2019.


Quote
Is the burn-to-earn ratio near the tipping point where AIM goes cash-flow negative? 

I think these loyalty programs are really sticky.  Most of the points/billings come from credit card spend (TD/CIBC/AMEX) and as long as these cards are the consumers' primary credit card - they're kind of on autopilot and people don't think about the points or switching their cards.   It's the banks that have the most to lose here, if Air Canada doesn't make a deal with AIM and selects new bank partners for its new frequent flyer program.  Even then, there's a lot of inertia before people will switch cards. 

Look at the Air Miles fiasco a few years ago when the Air Miles program started to cancel points.  There was a two-quarter "run on the bank" but after Air Miles reversed its policy, everything went back to normal and Air Miles has seen no impact on its business.  As long as AIMIA doesn't cancel points outright by putting a time limit on using them, their liability will be very stable and its a Blue Chips stamps kind of liability with very high breakage over time.


Yes, cards are a big deal and represent a large chunk of the billings.  But, card use was down 4% year-over-year.  If AC launches its own Star Alliance based program and cuts a deal with, say Scotiabank or the Royal Bank for a credit card program, how many people will switch cards?  I agree that the autopilot concept plays heavily here and most people will continue to use their Aeroplan cc, but some percentage of users will walk.  So, card use is already down 4% Y-o-Y, what happens if 10% of current card users switch to the new program (this is getting to my question of cashflow tipping point of the burn-to-earn ratio)?  What if it's more than 10 percent?  Just for rough justice, 10% would represent what, about, $20m/quarter of billings and FCF for the quarter was about $20m?

Interestingly enough, non-AC and non-card retail partners registered a 16% reduction in their billings.  Maybe some of this was Esso?  Maybe there was a lack of retail promotions?  But in any case AC was the only partner that registered an increase in billings of 1%.  Add it all up, and miles accumulated are down 5% year over year and AC hasn't even launched its new program yet.

So far the "run on the bank" has lasted three quarters and doesn't look like it's slowing yet.  I guess time will tell whether it abates or gets worse.




Quote
If they can't arrive at a deal with the AC consortium, this looks like a real dog.

Well, if you listen to today's CC, you'll understand that AC's offer of $250m was a gross cash offer, and after onerous deal conditions were factored in, the net cash to AIM was a lot lower.  That's the part we don't have details on.  The cash part is the tip of the iceberg and the factors like working capital adjustments, mileage liability assumptions, breakage, which employees go with the deal, who assumes pension obligations for transferred employees, whether redemption contingency cash is transferred to AC or stays with AIMIA can swing the economics from cash positive to cash negative (ie, AIM has to pay AC to take Aeroplan).

I think AIM is fine because I think it will cost AC and the banks more than it will cost AIM if the deal breaks as their profit pools are bigger.  But that's what makes a market.

I do think the new CEO is terrific and "gets it".  Unfortunately, it looks like he's getting pressured hard by the lenders and the preferred holders who are absolutely panicking.  He also apparently is getting a lot of grief from major shareholders about the "lowball" $450m offer in the p-r.

wabuffo


Yes, there's probably a lot going on here that outsiders cannot know.  Certainly with this history, nobody would accuse AC of engaging AIM in good faith!  My poorly informed impression of the new CEO is also that he's a major improvement, but AIM probably needed him about four or five years ago.  Time will tell, but my sense is that this will not work out well for AIM shareholders

Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 03, 2018, 10:11:08 AM
Well, if you listen to today's CC, you'll understand that AC's offer of $250m was a gross cash offer, and after onerous deal conditions were factored in, the net cash to AIM was a lot lower.  That's the part we don't have details on.  The cash part is the tip of the iceberg and the factors like working capital adjustments, mileage liability assumptions, breakage, which employees go with the deal, who assumes pension obligations for transferred employees, whether redemption contingency cash is transferred to AC or stays with AIMIA can swing the economics from cash positive to cash negative (ie, AIM has to pay AC to take Aeroplan).

One of recent working assumptions I held was that the unsolicited offer (even the bonified one) would result in a negative cash flow event for Aimia which says a lot about the perception of Aimia's value from AC's point of view.

BTW wabuffo, your measured assessment of Aimia's real and potential strengths is appreciated (but I share SJ's doubts).

Thinking out loud here, given that:

-the banks and credit card company were explicitly supporting the offer
-the last counter-proposal by Aimia is miles apart from recently reported appraisals for Aeroplan by Mr. Mittleman
-definite termination of the previous arrangement results in uncertain outcomes for both.

Last fall, when I was holding preferreds, I wrote to Aimia's Board to suggest a compromise by setting up a joint venture. I wonder if a similar arrangement now would allow a compromise between bruised egos. They could setup a joint venture with Aeroplan A+L, with AC being majority partner (51%) and plan a gradual buyout over time contingent on reaching financial targets. AC could contribute about 200M. This would allow sharing the pain of the digestion of the excess redemption liabilities that AIM has accumulated on their books and allow sharing of the unimpaired cashflows going forward.

If it's not too late, time may be running out though.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 03, 2018, 10:43:35 AM
SJ, CB - I agree the sentiment and news flow is about as ugly as it gets -- but that's what makes this situation so interesting. 

My view is that the only thing that changes once the CPSA ends in 2020, is that Air Canada stops buying miles from Aeroplan, and Aeroplan no longer gets the Classic Fare cheap seats from AC (but can still buy the Market Fare seats like other volume buyers do).

The Aeroplan program will then transform into an Air Miles type of program but with some airline alliances (OneWorld, Porter, Westjet?).   The Air Miles program is a very illustrative example -- it has twice the number of members (11m vs Aeroplan's 5.5m) and generates $200m EBITDA -- which points to a $100m EBITDA for Aeroplan post-AC split.

The question is will the existing deferred revenue/mileage liabilities blow-up in a bank run such that Aeroplan never gets to that future state?

I think these types of liabilities are not very well understood and are quite sticky.  Look at Buffett's experience with Blue Chip Stamps -- the liabilities lasted for decades after stamp issuance stopped cold.   I think, worst case, there may be a slightly elevated burn-vs-earn ratio but not life-threatening.  I also think there will be elevated breakage for structural reasons (eg some AC frequent flyers stranding a high percentage of miles in Aeroplan as they some switch to AC's new frequent flyer program, etc).

The bigger question is what will the banks do.  These loyalty programs are incredibly important to their credit card franchises so perhaps they take them in-house.  But I don't think they want the unredeemed points liabilities on their balance sheets as it negatively impacts their capital ratios -- so there is a role to play for Aeroplan, Loyalty One/Air Miles businesses since they hold the deferred revenue liabilities on behalf of the airlines and banks which don't want them.

I also think that Air Canada has to fish or cut bait here -- they can't solicit new partners for their in-house program if they look like they might buyback the Aeroplan program.  What banks will waste their time investing resources to start up new cards if they think AC will pull the rug out from them with a sudden acquisition of the Aeroplan program.

We'll see - high risk/high reward for sure.  BTW - I agree with your POV that previous mgmt really messed up a great business in such a way that limits the new CEO's degrees of freedom.

Thanks for your viewpoints!  Much appreciated.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on August 03, 2018, 11:05:54 AM
Airmiles has twice as many members, but also way more partners. They have great partners in gas, grocery, pharmacy, liquor, hardware etc.

The business also has significant scale benefits. Of you were a retailer, you would prefer the program with more members, as you get more benefits. As a consumer, it makes sense to consolidate points where you can earn them lots of places.

I think half of the Air Miles EBITDA has to be a best case scenario for a program with half the number of members and nowhere near the number of partners.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 03, 2018, 12:00:41 PM
Quote
The business also has significant scale benefits. Of you were a retailer, you would prefer the program with more members, as you get more benefits. As a consumer, it makes sense to consolidate points where you can earn them lots of places.

Hard to argue with your point.  But I think Aeroplan will still focus largely on airline seats while slowly expanding its offerings with retailers once the all-clear signal is obvious to all.  For some reason, consumers have this attraction with airline ticket redemptions (even though few do the calculations on a cents per mile basis which shows that they are often not the best deal -- ie, you can get lower fares paying cash/credit).  It makes it a great business because the average float is long-tail (24-36 months) with high breakage (10-20%).

The Porter CEO was on BNN explaining the deal with Aeroplan.  Porter will be offering a set % of seats to Aeroplan on a fixed-cost basis (similar to Air Canada's Classic Fares).   Aeroplan was responsible for purchasing 2 million seats on AC flights last year.  This is a huge boost for Porter if they get even a small fraction of that business.  Expect Porter to announce new routes to Florida and the US plus add planes to meet the demand as the incremental load factors add scale.

I'm sure the negotiations with OneWorld (primarily American Airlines and British Airways) are to also offer similar fixed cost basis terms to Aeroplan.  I wonder why WestJet isn't also talking to Aeroplan - perhaps they are waiting to see what comes from the negotiations with AC.

I think Air Canada has made a huge mistake and will take over 5 years to get to 5m+ members, if not longer.  Meanwhile they have invited competitors to add capacity on their turf while their business loses some of the seats Aeroplan used to buy.

What is $100m EBITDA on a steady-state basis on 153m common shares outstanding worth?  What is 48.9% of PLM's growth rate in EBITDA going to be by 2020 (currently $100m CAD run-rate)?

Again - thanks for the critical view points.  It's very good feedback.  I'm sorry for taking up so much air-time and I'll go back to lurking. 

wabuffo
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on August 03, 2018, 12:45:03 PM
One big risk here is timing and shrinkage. Even if they get to 100 MM EBITDA, they could be free cash flow negative for a long time.

If the program is 1/2 the size going forward as it is now in terms of earning (which seems possible based on losing the AC mileage issuance and some cc customers), they will burn cash as the deferred revenue balance decreases.

If there is no free cash flow for the next 5-7 years, the NPV could be low.
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on August 03, 2018, 01:03:38 PM
One big risk here is timing and shrinkage. Even if they get to 100 MM EBITDA, they could be free cash flow negative for a long time.

If the program is 1/2 the size going forward as it is now in terms of earning (which seems possible based on losing the AC mileage issuance and some cc customers), they will burn cash as the deferred revenue balance decreases.

If there is no free cash flow for the next 5-7 years, the NPV could be low.


If there is no FCF for the next 5-7 years, chances are that AIM will be insolvent.  Assuming that they cannot renew their existing debt or float new debt, they only have about CAD$200m of cash available.  They cannot run negative FCF for very long with that amount of cash.  Under that scenario, they'd be selling assets or declaring insolvency.

And, I don't think that's a crazy idea.  We know that revenue from Aeroplan must come down.  They will lose AC's billings and replace a small fraction of it by having at least some billings from Porter.  Will Porter's billings be one-quarter of AC's?  They don't have many domestic routes, they have no transatlatic/transpacific, precious few US routes and virtually no market share for the routes they do have.  AC was 18% of AIM's gross billings in Q2.  So would that 18% be vapourized and replaced by 5% from Porter?  That would mean you'd vapourize ~$54m of quarterly revenue from AC and replace it by perhaps ~$16m from Porter?  That kind of magnitude would cut the top line by ~$38m.  FCF for Q2 was $20m, so if you cut the top line by ~$38m, does FCF disappear entirely?  And, as I posited a few posts ago, if you lose 10% of your credit card users under the assumption that they migrate to AC's new program, that might cost you another ~$20m of billings per quarter, which does what to the FCF?  As far as I'm concerned, unless AIM is able to reduce its cost of redemptions, they stand a strong chance of going FCF negative for several quarters.


SJ
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 03, 2018, 02:17:01 PM
Quote
As far as I'm concerned, unless AIM is able to reduce its cost of redemptions, they stand a strong chance of going FCF negative for several quarters.

I'm not concerned.  You've already seen slightly elevated burn-to-earn ratios and it's still cash flow positive after the Air Canada cancellation notice from last year.

The deferred revenue is recognized at full gross billing cash value but the direct cash cost of the liability is a lot lower.  For every $1 of gross billings coming in (and sitting on the balance sheet as a deferred liability), the direct costs of redeeming the points for each $1 of billings is 59-cents.  So the way I think about it is -- at the end of Q2, the b/s deferred revenue liability of $2.9B is really a cash liability of $1.7B to to meet redemptions dollar-for-dollar with zero breakage.

But it's actually even lower than that because you first have to assume 13% breakage off the top, then take 59% of the after-breakage gross billing value.   And I'm willing to bet the breakage in all of these transitions will be a lot higher than the 13% of a steady state situation.  But let's go with 20% (it used be 18% when Aimia used to have an expiry date on points).  So $2.9B gross x .8 x .59 = $1.3B of actually cash liability against two years worth of gross billings ($2.6B).  Even if I completely eliminate AC's contribution and cut credit card gross billings, I don't think this is going to be a problem.

This is a business that reports accounting losses but positive free cash flow and generates float as it does.   The deferred revenue on the balance sheet is an accounting value -- but not a cash liquidation value.  It confuses everyone -- including the analysts and rating agencies.

Plus - Aimia can silently gate redemptions and/or devalue the rewards if they have to (which I don't think they will).  As long as they don't make the same mistake that Air Miles did (ie, set a hard deadline for miles going to zero), they will not have a run on the bank/cash flow problem.  People tend to forget about their miles and rarely remember the redemption grids.  But tell them that they will lose their points at a certain date and you will invite a run.   The whole loyalty industry learned from the Air Miles fiasco.  Aeroplan which had a time limit also removed it as well.

I think they can and will pay down debt and continue to strand the preferreds.  At that point, they will be free to execute their non-AC Aeroplan strategy.  But they will have to communicate what they are doing with all stakeholders (members, banks, creditors, etc) and execute well.  The new CEO gives me more confidence than previous mgmt but his window is closing since Aimia should've been doing this years ago.

We'll see I guess.  I could be very wrong about this situation.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on August 03, 2018, 03:09:47 PM

This is a business that reports accounting losses but positive free cash flow and generates float as it does.   The deferred revenue on the balance sheet is an accounting value -- but not a cash liquidation value.  It confuses everyone -- including the analysts and rating agencies.


The problem is, they've generated a lot of float in the past, which they spent on dividends, buybacks, and exec comp.

If the business shrinks, that becomes net negative cash flow as they have to redeem more miles than they issue in any given year.
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on August 03, 2018, 03:19:00 PM
Quote
As far as I'm concerned, unless AIM is able to reduce its cost of redemptions, they stand a strong chance of going FCF negative for several quarters.

I'm not concerned.  You've already seen slightly elevated burn-to-earn ratios and it's still cash flow positive after the Air Canada cancellation notice from last year.

The deferred revenue is recognized at full gross billing cash value but the direct cash cost of the liability is a lot lower.  For every $1 of gross billings coming in (and sitting on the balance sheet as a deferred liability), the direct costs of redeeming the points for each $1 of billings is 59-cents.  So the way I think about it is -- at the end of Q2, the b/s deferred revenue liability of $2.9B is really a cash liability of $1.7B to to meet redemptions dollar-for-dollar with zero breakage.

But it's actually even lower than that because you first have to assume 13% breakage off the top, then take 59% of the after-breakage gross billing value.   And I'm willing to bet the breakage in all of these transitions will be a lot higher than the 13% of a steady state situation.  But let's go with 20% (it used be 18% when Aimia used to have an expiry date on points).  So $2.9B gross x .8 x .59 = $1.3B of actually cash liability against two years worth of gross billings ($2.6B).  Even if I completely eliminate AC's contribution and cut credit card gross billings, I don't think this is going to be a problem.


Okay, so let's follow that logic.  If the current quarter FCF is $20m, and if you lose $38m/quarter in billings as a result of switching from AC to Porter, and if you lose 10% of your credit card users who decide to migrate to AC's plan which would cost you another ~$20m/quarter in billings, what happens to your FCF?  So, might it be the lost quarterly revenue of $58m less the associated cash redemption costs of ($38m + $20m) x .8 x.59 = ~$31m reduction in FCF?  So, assuming that your cash cost structure is correct, the loss of revenue from AC flights and from a potential modest decline in CC usage would be enough to put AIM's quarterly FCF negative to the tune of $20m - $31m = -$11m?  And that's just the result of lost revenue.  It doesn't even hypothesize that a bunch of people might rush to redeem their existing miles (ie, the run on the bank theory).


Quote
This is a business that reports accounting losses but positive free cash flow and generates float as it does.   The deferred revenue on the balance sheet is an accounting value -- but not a cash liquidation value.  It confuses everyone -- including the analysts and rating agencies.

Plus - Aimia can silently gate redemptions and/or devalue the rewards if they have to (which I don't think they will).  As long as they don't make the same mistake that Air Miles did (ie, set a hard deadline for miles going to zero), they will not have a run on the bank/cash flow problem.  People tend to forget about their miles and rarely remember the redemption grids.  But tell them that they will lose their points at a certain date and you will invite a run.   The whole loyalty industry learned from the Air Miles fiasco.  Aeroplan which had a time limit also removed it as well.

Devaluing rewards is the one real meaningful lever that AIM still has.  Aeroplan miles from Porter flights cannot replace those lost from AC flights because the size of AC's business absolutely swamps Porter.  There's not much to do about that unless AIM can convince Porter to award 2 or 3 reward miles for every mile that people actually fly.  If a certain portion of the flying public choose to migrate to AC's new program and sign up for a new credit card for that program, there's not much that AIM can do about that, short of offering some really sexy (and expensive) promotions to keep their existing base of credit card users.  They don't have many good levers left, but devaluation is still there.

Quote
I think they can and will pay down debt and continue to strand the preferreds.  At that point, they will be free to execute their non-AC Aeroplan strategy.  But they will have to communicate what they are doing with all stakeholders (members, banks, creditors, etc) and execute well.  The new CEO gives me more confidence than previous mgmt but his window is closing since Aimia should've been doing this years ago.

We'll see I guess.  I could be very wrong about this situation.

wabuffo


Oh, they will definitely pay down their debt.  If you were a note holder for the notes that come due next spring, would you renew?  What kind of interest rate would it take for you to renew?  Would 10% be high enough, or would you just insist on getting your capital back and find a safer fixed income investment?  What kind of covenants would you require from an outfit like AIM? My sense is that they have almost zero hope of extending the existing notes through an exchange offer and almost zero hope of floating new notes.  In my opinion, AIM will be paying back its existing notes out of cash.  Same thing for the line of credit.  Can you think of any Canadian bank that would want to renew AIM's revolver at this point?  The revolver will be paid back too when it comes due in two years.  All of that can be done with existing cash and investments.

Sadly, I am unconvinced that a happy ending is coming for pref-holders and common shareholders.


SJ
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 03, 2018, 04:45:36 PM
SJ - great discussion - I'm happy about your skepticism.  Its a good conversation.
Quote
Okay, so let's follow that logic.  If the current quarter FCF is $20m, and if you lose $38m/quarter in billings as a result of switching from AC to Porter, and if you lose 10% of your credit card users who decide to migrate to AC's plan which would cost you another ~$20m/quarter in billings, what happens to your FCF?  So, might it be the lost quarterly revenue of $58m less the associated cash redemption costs of ($38m + $20m) x .8 x.59 = ~$31m reduction in FCF?  So, assuming that your cash cost structure is correct, the loss of revenue from AC flights and from a potential modest decline in CC usage would be enough to put AIM's quarterly FCF negative to the tune of $20m - $31m = -$11m?

I don't think so.  Let's use the actual numbers.

Gross billings before adjustments = $367
loss of AC, -10% CC + Porter       =($ 58)
Net Gross billings                     = $309

Direct costs (same as Q2)            =($222)   very high burn-to-earn ratio which I don't think will actually happen
Cash Gross Margin                      = $ 87
SG&A                                         = $ 80  Note - less SBC & after $70m in annual committed cost cuts.
Cash Operating Income             = $ 7

That's $28m of positive annual cash flow - even in your "burn-down" scenario.  But I don't think it will be that bad.

1) I'm assuming that debt has been retired - no interest expense post-2020.  I think that's doable. 
2) I would also note that I think AIMIA would take action to bring their direct costs for redemptions down by gating and devaluing - so my guess would be cost of redemptions would be controlled below this number.
3)New Gross billings from Porter would be very positive cash flow from a working capital POV due to expansion of deferred revenues from this source with little corresponding redemption from this new source.  See explosion of operating cash flow when TD came aboard in 2013. 
4) I'm not including the dividend stream from PLM worth $20m per year.

Its not an optimal situation but its a worst case scenario that still generates positive free cash flow. 

Of course, no one knows for sure - but I think Aimia can do $100m annual EBITDA post AC departure in line with Air Miles adjusted for pro-rata membership.  Again, I could be very wrong.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on August 03, 2018, 05:05:14 PM
I doubt many miles are redeemed the same quarter they are earned. Most people save them for a larger item (flight).

Thus, if they have a $58 MM decrease in revenue, they probably have pretty close to a $58MM decrease in free cash flow, since most of the cash redemption expense is from the $2B in existing miles.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 03, 2018, 05:39:17 PM

But it's actually even lower than that because you first have to assume 13% breakage off the top, then take 59% of the after-breakage gross billing value.   And I'm willing to bet the breakage in all of these transitions will be a lot higher than the 13% of a steady state situation.  But let's go with 20% (it used be 18% when Aimia used to have an expiry date on points).  So $2.9B gross x .8 x .59 = $1.3B of actually cash liability against two years worth of gross billings ($2.6B).  Even if I completely eliminate AC's contribution and cut credit card gross billings, I don't think this is going to be a problem.

This is a business that reports accounting losses but positive free cash flow and generates float as it does.   The deferred revenue on the balance sheet is an accounting value -- but not a cash liquidation value.  It confuses everyone -- including the analysts and rating agencies.

Plus - Aimia can silently gate redemptions and/or devalue the rewards if they have to (which I don't think they will).  As long as they don't make the same mistake that Air Miles did (ie, set a hard deadline for miles going to zero), they will not have a run on the bank/cash flow problem.  People tend to forget about their miles and rarely remember the redemption grids.  But tell them that they will lose their points at a certain date and you will invite a run.   The whole loyalty industry learned from the Air Miles fiasco.  Aeroplan which had a time limit also removed it as well.

BTW, these comments are coming from the sidelines for now but the evolving story is simply fascinating and hopefully this discussion is helpful to somebody.

First on the redemption liability (deferred revenue), from careful review of Aimia's disclosures and accounting references (but not from direct questioning the CFO department), I'm not sure that the deferred revenue is recorded gross of breakage. Some disclosure suggests that the liability is valued at "unrecognized" breakage ie gross of breakage? (but may mean until breakage rate is changed?) but when looking at most disclosures related to breakage (and numbers affected on balance sheet when breakage has been or would be changed), it looks like the deferred revenue is reported net of breakage. 2013 annual report may be relevant. Edit: in 2013, TD committed to a 100M contribution for "program enhancements".

Second, on the breakage topic, there is a lot of confusion because, among others, one needs to define what happens 1- when breakage is changing and 2- when that change is recognized, as these two related scenarios have vastly different consequences on the balance sheet and cashflows. The recognition is simply a way to actualize the results that have happened. Breakage rate is the complement of the redemption rate and may go up and down because of intrinsic and extrinsic reasons. High breakage rates in the loyalty business usually correspond to a poor program and unsatisfactory level of engagement. Management obviously monitors this very closely and can "tweak" the redemption policies to counter redemption pressures but this is tricky for the long term business and, if "detected", can give rise to significant backlash with consumers potentially losing their stickiness. In this case, you could count on a relevant observer (AC) to underline unfavorable trends. The breakage is recognized at 13% which IMO is in a sweet spot and Aimia disclosed in the 2017 AR that a 1% change in breakage would correspond to a 150M change in revenues/earnings before tax, as a reminder of what SJ and bizaro are alluding to.
My base case is that they would produce enough cashflows to meet the debt deadlines but there are many scenarios with very reasonable assumptions where you would have the possibility of zero net free cash flow generation (or worse) for some time.  You can adjust the odds upwards with the new management team but, in a more "hostile" environment, I wonder if AC could not increase capacity in some areas, thereby compounding the redemption problem as Aimia has only relative ability to control timing of redemption using unfunded redemption costs. Potential lawsuits and all but this may end up being a scenario about who has most to lose...

Third, in a previous post you alluded to BlueChip Stamps. Details are not known AFIK but I suspect that 1- when Mr. Buffett and Mr. Munger bought it, it was fully funded, 2-breakage was probably high and getting higher over a long period of redemption and 3-the new management then invested the "float" in things like See's Candies which continued to provide a rising tide of free cash flows instead of (like bizaro described) distributing to outside investors as dividends (FWIW, using a few debatable and "subjective" inputs, I come to 1B+ in excess distribution especially in terms of an entity where going concern is called into question). Of course, the previous Aimia team suggested that they were "ready" even if the non-renewal announcement was unexpected ???

Apologies. I'm doing to you what I would hope you'd do to me if our positions were reversed. Good luck.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 03, 2018, 05:47:05 PM
Quote
I doubt many miles are redeemed the same quarter they are earned.

Never said they were -- the average round trip takes 24-30 months. (earn to burn).
Quote
Thus, if they have a $58 MM decrease in revenue, they probably have pretty close to a $58MM decrease in free cash flow, since most of the cash redemption expense is from the $2B in existing miles.

Yes except Revenue (gross billings) IS NOT EQUAL TO Cost of goods (redemption expense).  Its called deferred revenue AND NOT deferred redemption expense for a reason.

wabuffo

Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 03, 2018, 06:22:21 PM
Quote
Third, in a previous post you alluded to BlueChip Stamps. Details are not known AFIK but I suspect that:
1- when Mr. Buffett and Mr. Munger bought it, it was fully funded,
2-breakage was probably high and getting higher over a long period of redemption and
3-the new management then invested the "float" in things like See's Candies which continued to provide a rising tide of free cash flows instead of (like bizaro described) distributing to outside investors as dividends

CB - I'm glad you brought up Blue Chip Stamps. I was going to go into more detail about this and forgot to add this table. Max Olson has published some annual reports from Blue Chip Stamps, so full credit to him for the data in this table I've constructed (I hope he doesn't mind). 

                              (http://i64.tinypic.com/15cln9t.jpg)

This IMO is as good a model for AIMIA's liability as I can think of.  And a grocery program like trading stamps turns over much faster in terms of float/earn-to-burn than an airline mileage program (12 months for grocery vs 24 months+ for mileage).  Even as Munger/Buffett got control of it -- the program was still earning and burning billings & redemption expense.  But as the popularity declined, the liabilities ran off much more slowly than the gross billings decline as you can see from the duration column.

This is my central point - I don't think anyone really understands the dynamics of a loyalty program in run-off.  Everyone assumes the liability is money good when its not.  I just hope the current AIMIA CEO does.  Its clear the previous CEOs didn't and Mr. Market sure doesn't.  I think very little of AIMIA's current liability will decline even during the transition -- which means it will not have a liquidity problem - even before gating/devaluation tools that would be left in the toolbox.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: StubbleJumper on August 03, 2018, 06:25:11 PM
SJ - great discussion - I'm happy about your skepticism.  Its a good conversation.
Quote
Okay, so let's follow that logic.  If the current quarter FCF is $20m, and if you lose $38m/quarter in billings as a result of switching from AC to Porter, and if you lose 10% of your credit card users who decide to migrate to AC's plan which would cost you another ~$20m/quarter in billings, what happens to your FCF?  So, might it be the lost quarterly revenue of $58m less the associated cash redemption costs of ($38m + $20m) x .8 x.59 = ~$31m reduction in FCF?  So, assuming that your cash cost structure is correct, the loss of revenue from AC flights and from a potential modest decline in CC usage would be enough to put AIM's quarterly FCF negative to the tune of $20m - $31m = -$11m?

I don't think so.  Let's use the actual numbers.

Gross billings before adjustments = $367
loss of AC, -10% CC + Porter       =($ 58)
Net Gross billings                     = $309

Direct costs (same as Q2)            =($222)   very high burn-to-earn ratio which I don't think will actually happen
Cash Gross Margin                      = $ 87
SG&A                                         = $ 80  Note - less SBC & after $70m in annual committed cost cuts.
Cash Operating Income             = $ 7

That's $28m of positive annual cash flow - even in your "burn-down" scenario.  But I don't think it will be that bad.

1) I'm assuming that debt has been retired - no interest expense post-2020.  I think that's doable. 
2) I would also note that I think AIMIA would take action to bring their direct costs for redemptions down by gating and devaluing - so my guess would be cost of redemptions would be controlled below this number.
3)New Gross billings from Porter would be very positive cash flow from a working capital POV due to expansion of deferred revenues from this source with little corresponding redemption from this new source.  See explosion of operating cash flow when TD came aboard in 2013. 
4) I'm not including the dividend stream from PLM worth $20m per year.

Its not an optimal situation but its a worst case scenario that still generates positive free cash flow. 

Of course, no one knows for sure - but I think Aimia can do $100m annual EBITDA post AC departure in line with Air Miles adjusted for pro-rata membership.  Again, I could be very wrong.

wabuffo


Okay, that makes sense.  You are hanging your hat on future cost cuts to get quarterly SG&A down from ~$110m to $70m.  You ought to throw some maintenance capex into the works (it's damned near impossible to avoid some minimal IT investments), but you can certainly make the argument that AIM will be slightly FCF positive instead of slightly FCF negative.

1) I would agree that interest expense will become irrelevant after the banks announce the non-renewal of the revolver -- it's already pretty trivial today.

2) Agreed that reducing redemption costs is AIM's best lever at this stage.  Either increase the miles required for a reward or crank up the "scam charges" associated with flights (eg, carrier surcharge, admin charge, booking charge, whatever they elect to call it).

3) I don't understand how new gross billings from Porter will be any more cash flow positive than existing billings from AC.  Do you contend that a bulk of Porter clients will be new to Aeroplan?  I fly AC and I fly Porter on occasion, so for me any new miles from Porter flights will just get added to my existing miles from past AC flights.  I'm guessing that 90%+ of Porter clients are also current or past AC clients.  The other consideration is that the actual dollars of Porter billings will probably be very small (AC looks to be about 10 times as large as Porter if you just look at fleet size).

4) Yep there'll be a few bucks every year from PLM which will be helpful.


So the conclusion is that AIM is slightly cashflow positive if the world works out well, or slightly cashflow negative if things don't go well, unless measures are taken to control redemption costs?  Makes sense to me.  I don't see this working out well for pref holders or common shareholders.


SJ
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on August 03, 2018, 07:27:48 PM
I’d just like to say I enjoy watching Canadians disagree and debate. Just soooooo polite it’s hilarious.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 03, 2018, 09:06:45 PM

CB - I'm glad you brought up Blue Chip Stamps. I was going to go into more detail about this and forgot to add this table. Max Olson has published some annual reports from Blue Chip Stamps, so full credit to him for the data in this table I've constructed (I hope he doesn't mind). 

                              (http://i64.tinypic.com/15cln9t.jpg)

This IMO is as good a model for AIMIA's liability as I can think of.  And a grocery program like trading stamps turns over much faster in terms of float/earn-to-burn than an airline mileage program (12 months for grocery vs 24 months+ for mileage).  Even as Munger/Buffett got control of it -- the program was still earning and burning billings & redemption expense.  But as the popularity declined, the liabilities ran off much more slowly than the gross billings decline as you can see from the duration column.

This is my central point - I don't think anyone really understands the dynamics of a loyalty program in run-off.  Everyone assumes the liability is money good when its not.  I just hope the current AIMIA CEO does.  Its clear the previous CEOs didn't and Mr. Market sure doesn't.  I think very little of AIMIA's current liability will decline even during the transition -- which means it will not have a liquidity problem - even before gating/devaluation tools that would be left in the toolbox.

wabuffo

I looked into this also. There is some documentation that is easy to find up to 1982. What happened after is, to me, mostly inference.

The BlueChip program was funded and my understanding is that float continued to match redemption liabilities even when stamp accumulation revenues markedly decreased. Different scenario. One could say that things have changed (really?), but can you imagine Mr. Buffett paying 325M for Aimia with a clearly documented 2,4B unfunded redemption liability?

Interesting to note that they used conservative accounting reporting profit as a difference between invested float revenue (interest and dividends) and accumulation revenue minus all expenses. In the table that you provided, what is interesting especially is the redemption liability column. When you read the actual annual reports (what I looked at did not provide financial notes) what you find is that the decreases in redemption liability in 1980 and 1982 was essentially the result of a re-evaluation of the liability (increased estimated breakage rate) and not increased redemption activity with negative cashflow pressure. The stamp collection industry was dying, not exactly the same scenario that we are actually going through with AC and AIM since both want to expand the loyalty program, in a very public way!

What is super interesting is the description that Mr. Munger provides in the 1982 report about a potential "run" on the liability. It's not clear what happened after 1982, but from some indirect evidence and deductions, I come to the conclusion that the liability slowly decreased over time in a relative inflationary environment and I suspect that the liability became re-adjusted down as the eventually recognized estimated breakage rate went up. But, they were not sure of that in 1982:

"Our continued substantial profits in the trading stamp business, in the face of huge decreases in sales, are made possible only by the slow departure of "float" from trading stamps sold in earlier and better years. This "float" — resulting from past issuance of trading stamps when volume was many times greater than the current level — is very large in relation to current issuances. (Trading stamp revenues peaked at $124,180,000 in fiscal 1970, and our 1982 revenues of $9,203,000 therefore represented a decline of 93% from peak volume.) Eventually, unless stamp issuances improve, earnings from investing "float" will decline enormously. And, since the trading stamp business already operates at a loss before taking investment revenues into account, such future declines in "float" will aggravate what is already a poor situation. This happens because any significant decline in non-investment revenues is inevitably more rapid than the related decline in costs. Such is the normal result for any operator of a chain of retail stores (like our trading stamp redemption stores) whose "same store" sales decline in dollars from year to year."

So, if you want to make a parallel, the genius behind what the two legends did appears to be 1- making money that reproduces itself through float and 2- invest in a loyalty business where people will eventually forget about the currency.


Homestead31,

Why don't you jump in? Insult me and I'll insult you back and we'll have fun. :)
If you want real entertainment about Aimia and "investing", I can refer you to other on-line forums. Brutal.



Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 05, 2018, 10:44:47 AM
Quote
The Blue Chip program was funded and my understanding is that float continued to match redemption liabilities even when stamp accumulation revenues markedly decreased. Different scenario. One could say that things have changed

CB - I actually think they are very similar in nature.   Part of the problem in defending my argument is that I keep switching back and forth between a going concern scenario (ie, that Aeroplan/AIMIA squeaks through to the other side of a non-AC CPSA world in 2020 and becomes a viable loyalty program) and a liquidation scenario (there is no future post AC CPSA 2020, and even TD/CIBC leave in 2024 when their agreement ends).  I am no way arguing that this is an acquisition target as I understand that the assets from this accumulated deferred revenue liability were long ago pissed away (unlike in Buffett's case, where the assets were still there sitting in municipal bonds waiting to be redeployed into See's, Wesco and the Buffalo News).

I'm using the Blue Chips stamps data to argue that in a worst-case -- i.e., liquidation/run-off scenario, the ultimate liability of the deferred revenue liability is very low on a cash NPV basis and it can be put into run-off on a cash flow positive basis.  But first let's highlight the different operating parameters of the two loyalty programs (Blue Chip Stamps - BCS) vs (AIMIA/Aeroplan - AIM):
 
Steady State                                                BCS                             AIM
 
Loyalty Unit                                                stamps                          miles
Earn-to-Burn Duration (months)                      12                               24
Breakage %                                                  3-7                            11-18
Non-loyalty unit direct cost (ie SG&A)%          50%                            30%

I post these statistics (from the Blue Chip Stamps and old BRK annual reports) because they show that the BCS loyalty program would be harder and more costly to unwind than the AIM program.  BCS had lower breakage and faster turns which meant that members could accumulate and redeem more easily.  It was costlier to administer during its wind-down because of its higher fixed costs. I.e., it operated 23 retail locations in California where members would go with their book of stamps to redeem prizes for much of its decline (until 1985 when Buffett/Munger finally closed them down for good and went mail-order). BCS also lost big customers (Stater Brothers that represented 51% of revenues) like AIM potentially will.  AIM's program isn't burdened with such high operating costs -- or doesn't have to be. (it's basically on-line and all of its expensive marketing and overhead costs could be dramatically scaled down in a liquidation scenario).

I think these loyalty programs can be unwound with very high breakage, so long as:
(1) you never threaten to extinguish points -- e.g, Buffett said that Blue Chip Stamps generated $26 thousand of revenue in 2006(!) so he has never extinguished stamps or put a time limit on them.
(2) you slowly depreciate the currency so that nobody notices it or feels it.

I think Aeroplan is much more likely to effectively strand a lot of miles because it takes longer to accumulate enough miles for a free flight.  A declining program actually makes redemption harder as accumulation options decline (AC leaving in 2020, CIBC/TD leaving in 2024) a lot of miles will get effectively stranded - much more than in Blue Chip Stamps experience.  Put it this way - Aeroplan has probably 200 billion miles divided amongst 5.5 million members.  That's about 36k miles per member on average.  That's not enough for a free flight.  Yes - Pareto says that the frequent fliers and biggest spenders will redeem easily, BUT there is a long-tail of 2-5k mile holders that ultimately will get stranded.  Its not a literal run on the bank, because you can demand your deposit from a bank even if you have just $1 in your account.  To extend the bank metaphor further, you kinda get the points for "free" so stranding a few isn't a big deal, whereas your bank deposit is cash you saved after taxes on your pay so you feel much more strongly about it.

So let's run some numbers indexing the BCS experience to Aeroplan's experience post 2020.

                 (http://i65.tinypic.com/2dtaate.jpg)

This example is purely illustrative - the actual Aeroplan experience will be different.  For example, the 2021 drop in billings is likely to be less severe because AC goes but the credit card billings will still be there.  The big drop may be in 2024 after the banks and their Aeroplan credit cards leave.  But let's go with it.

Now let's run a pro-forma deferred revenue account with opening and closing balances and gross billings coming in, thus, solving for revenues (ie, deferred revenue coming out.). I know that there are re-statements happening every year that adjust the deferred revenue balance up and down -- but let's ignore these.   To convert the revenue into cash redemption expense, I am starting at a 59% assumption (ie. $1 deferred revenue = 59-cents of cash redemption expense).  But just like the Fed, I will set a 2% inflation target (ie, reducing the value of the cash redemption by 1% per year).

            (http://i68.tinypic.com/1z2ke9g.jpg)

IMO, the deferrred revenue liability never comes due, even in a liquidation scenario because by 2030, that deferred revenue liability is probably 60-80% breakage and after you factor in conversion to redemption cash expense and bring it back to present value - its negligible.  And that is even with large burn-to-earn-ratios in the early years of 125%+!  Of course gross profit is before SG&A, but I'm assuming in a liquidation scenario, the expensive marketing people and expensive offices are gone and in their place is an accounting guy working out of a dingy lawyer's office with no windows and the only art on the walls is "Dogs Playing Poker".

It's a controversial viewpoint, but:
(1) once the revolver/long-term debt is paid off,
(2) the preferreds can be perpetually stranded, and
(3) the deferred revenue liability can be put off for a long time without being cash-flow negative.
In the hands of the right kind of activist CEO, you could create value over a long period of time even if Aeroplan dies.  I don't think it ever becomes insolvent because loyalty programs can't.  Back to the Fed example, its the same reason why the US Treasury will always pay back its debt.

But that's the worst-case scenario.  I think they can replace Air Canada, and after a bumpy transition, emerge as a viable loyalty program post-AC.  I just wanted to tie my argument together more coherently.

Of course, I agree that this is a risky and speculative common stock right now.  So stay away!

wabuffo
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on August 05, 2018, 10:58:00 AM
It's hard for them to excel as both a liquidation and a going concern, in many ways management needs to pick.

As one example, they have said you'll be able to transfer miles to hotel and/or airline programs. That makes the program more attractive for continued use, but hurts it for liquidation. A lot of these 5-7k balances that would otherwise break will get transferred elsewhere.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 05, 2018, 04:57:38 PM
"But that's the worst-case scenario.  I think they can replace Air Canada, and after a bumpy transition, emerge as a viable loyalty program post-AC.  I just wanted to tie my argument together more coherently."

Thanks for your time.

-On the redemption runoff, here's a link that you may find interesting:
http://articles.latimes.com/1993-08-19/news/vw-25199_1_blue-chip-stamps
I see your point but the comparison has some significant differences.

I understand that the BlueChips program faded away quite significantly after 1982 with both revenues and redemption activity going down. In 1993, the sub president seems to refer to a 10M+ redemption liability which is way below your "projection" for Aimia in a liquidation scenario and I think that the most likely cause for this was (for BlueChips) not an increase in redemption activity but quite the opposite, a reduction of redemption activity AND a proportional increase in the recognized breakage rate.

So for Aimia, the challenge seems to be to promote their currency while at the same time hoping for less engagement ???.

But, this investment makes sense if you "believe" in the transformation. I have to say that I find the Canadian loyalty market to be quite crowded with more and more programs chasing the same customers. If AC does not eventually buyback Aeroplan, the outcome may be related to who can transform better: the loyalty program that wants to become an airline or the airline that wants to build a loyalty program from quasi-scratch. Sometimes, one has to wonder about the rationality of those involved but maybe I lack vision as I have never been comfortable with the concept of printing money and relying on goodwill. :)
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on August 05, 2018, 05:21:35 PM
There is definitely more competition entering the marketplace.

PC Optimum is a relatively new program born of the merger between the largest grocer program and the largest pharmacy program. They also recently added Esso/Mobil gas stations, so have the potential be a formidable competitor. Somewhat relevant, Esso used to be an Aeroplan partner.

Canadian Tire/sportcheck/marks has also recently launched a combo program called Triangle.

Also, I think Blue Chip breakage in the 80's might not be equivalent on a run down. Those stamps would get physically lost, whereas if you remember your email address your aeroplan miles will still be there in 5 years when someone casually mentions you can convert them to hotel points to get something out of them.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 05, 2018, 05:45:31 PM
Quote
In 1993, the sub president seems to refer to a 10M+ redemption liability which is way below your "projection" for Aimia in a liquidation scenario and I think that the most likely cause for this was (for BlueChips) not an increase in redemption activity but quite the opposite, a reduction of redemption activity AND a proportional increase in the recognized breakage rate.

CB - thanks for the article.  I hadn't seen it before.   Yes - I think accumulation and redemption are the opposite sides of a reflection into a mirror.  I don't think these loyalty programs ever exhibit explosive burn-to-earn ratios.  Rather as accumulation goes down, redemptions go down as well and breakage increases so that the redemption liability stays at a historical level.

After 1985, BRK stopped breaking out the trading stamp business financials and md&a in the annual report.  The redemption liability stayed constant at around $60m dropping slowly each year.  Then this appeared in the annual report for 1985:
Quote
"...the factor for redemption-probability used in the computation of the 1985 year-end unredeemed liability was revised further downward.  The revision had the effect of reducing the unredeemed liability at December 28, 1985, and Berkshire’s cost of services sold, by approximately $10,800.  The after-tax effect was to increase Berkshire’s 1985 net earnings approximately $5,300
.
I think there's a reason Buffett resisted the urge to write down the redemption liability and keeps the business open, even to this day.  It is to delay paying taxes on the breakage income, and we know Buffett loves deferring taxes.  That's why the guy in your article says "the IRS would agree with that".  The only pressure on writing it down is justifying to the IRS why you shouldn't pay cash taxes on the real economic gain. 

That's what makes these loyalty programs so interesting -- you get the cash from billings up front, you defer the cash costs of redemptions out 24-30 months, on average, and delay much of the cash taxes for as long as the IRS or CRA will let you.  Plus you get to set the price on your costs.  That's a dream business - you can never go insolvent, just like the US Treasury!

wabuffo
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 05, 2018, 06:05:23 PM
Quote
I have to say that I find the Canadian loyalty market to be quite crowded with more and more programs chasing the same customers.

I think this is an excellent point, CB and bizaro86!  It is a crowded market -- particularly in credit cards. This is actually to Aeroplan's advantage.

I think this is what brought AC to the table to make a bid for Aeroplan.  My pet theory is that AC is having trouble lining up credit card partners for their new mileage program.  All the big banks are locked-up.  Its not a coincidence that Westjet signed up with RBC last year when AC dropped Aeroplan.  It locked up all the big banks plus AMEX after they re-upped with Aeroplan.  I guess Laurentian Bank might be available.

Getting to the pole position in a consumers' wallet for spending is getting more and more difficult.  The banks make so much money from the credit card receivables and fees.  Switching consumers from one credit card to another is hard, risky and getting more expensive.  Think about it -- you have to offer free miles (20,000 miles costs the bank $200 per consumer) and there's no guarantee that the card becomes no. 1 for that consumer's spending after the switch.  That's why AC's $50 per member offer was ridiculous.

Now if you are already on an Aeroplan card, you will demand that your points follow you if TD is trying to switch you to an Air Canada card.  Well that's going to cost TD an average of $400 to buy your miles (avg Aeroplan member = 40k miles @1-cent per mile) and bring them into the new card. TD is going to want Air Canada to pay for that.  If you remember in 2013, when TD bought half of CIBC credit card accounts, they also got paid $150m to make cardmembers whole.

I think Aeroplan has a strong hand here - and I hope the new CEO plays it well.  Focus on getting the debt paid down and then take your time rebuilding your loyalty program. 

wabuffo
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on August 05, 2018, 06:23:32 PM
I would imagine Scotiabank would be pretty interested in getting the Air Canada credit card business...

Title: Re: AIM.TO - Aimia
Post by: mcliu on August 06, 2018, 05:29:38 AM
Are there any examples of less successful loyalty runoffs than Blue Chips as a comp for Aimia? Just in case that Blue Chip was the exception not the norm..
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on August 06, 2018, 09:56:45 AM
http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/AIM-CN-open-letter-to-BOD-08-06-18-FINAL.pdf

Title: Re: AIM.TO - Aimia
Post by: bathtime on August 06, 2018, 10:07:10 AM
http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/AIM-CN-open-letter-to-BOD-08-06-18-FINAL.pdf

I think this is such a bad-ass letter to the board — whether or not you agree with his points.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 06, 2018, 12:52:35 PM
The new CEO and Mittleman really need to get on the same page.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 06, 2018, 01:02:06 PM
http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/AIM-CN-open-letter-to-BOD-08-06-18-FINAL.pdf

I think this is such a bad-ass letter to the board — whether or not you agree with his points.

I think the tone of the letter was OK.
I was wrong on the negative cashflow event with the "improved offer" but I assume the offer became barely positive and AC had targeted the reserve funds as part of the closing conditions. It just goes to show how far apart the two parties were.

In the letter, the comments about the redemption liability being part of business as usual deal (negative working capital) is interesting. When you think about it, if AC starts their own program, they would gradually build this liability and all corresponding incoming cashflows would account for most of the NPV value that they attribute to this hypothetical venture at this point. Also of note (versus the BlueChip example mentioned before whereby the program became gradually forgotten), is the fact that AC, assuming a successful "launch", would likely try to "drive" their program and encourage redemption using unfunded costs recorded in the liability section of their new competitor.

Since the issue is price discovery and given what the letter implies about the redemption liabilities, I wonder why other players (private equity) are not getting involved, especially given the present context of optimistic projections and ease with leverage. In other forums, LoyaltyOne is mentioned which is interesting but I suspect that they would also lowball an offer because the move would simply be to consolidate market share.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 21, 2018, 06:14:29 AM
https://www.aimia.com/newsroom/news-releases/
Title: Re: AIM.TO - Aimia
Post by: KJP on August 21, 2018, 06:44:57 AM
https://www.aimia.com/newsroom/news-releases/


I haven't followed to closely, so there may have been developments over the last few weeks that I missed, but what does it say about Mittleman that he's supporting this after telling his investors just last month that Aeroplan is worth $1 billion CAD at the absolute minimum, and is really worth closer to $1.5 billion CAD.

You all probably have already seen it, but here's what Mittleman was saying to his own investors (and to Aimia's board):

In writing to my clients about Aimia, I have used a very conservative value of C$1B for Aeroplan,
which was quoted in the press recently. But that valuation is based on my most conservative
estimate of C$100M in EBITDA post-2020 on a standalone basis, and not reflective of any control
premium. The strategic value of Aeroplan is clearly much greater than its stand-alone value to
Aimia. Thus, a compromise between what it’s worth to Aimia, at certainly no less than C$1B,
and what it’s worth to the consortium, at C$2B+, seems reasonable. That is 4.3x to 8.6x EBITDA
of C$234M currently, versus 10x to 20x EBITDA of C$100M in 2021 to a buyer other than Air
Canada, and really less than 10x to 20x given the much higher EBITDA and FCF in the next 2
years would reduce the effective multiple significantly for the buyer closing in 2018.

If Aimia cannot obtain at least the stand-alone value of Aeroplan, C$1B, plus a modest control
premium of 20%, then I’d prefer Aimia not sell it.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 21, 2018, 07:17:15 AM
Mittleman's comparisons with previous airline mergers never made sense to me because the float is assumed to remain constant in those cases.  Each example was strictly a buy analysis.  In Air Canada's case, they are looking at buy-vs-build comparative cash flow economics so their offer would always be lower to reflect the lack of a cash-flow springloading benefit from ramping up a new mileage program.

There are important details that have yet to be disclosed so we should wait and see before judging the deal (employee transfer, pension liabilities, working capital adjustments, etc).  For example, the press release says the deal is "cash-free, debt-free" - so in addition to getting $450m at deal close, AIM will get to keep their current $250m in cash plus additional cash accumulation over the next 6 months (Q3/Q4).  In addition, we have to hear Aimia's plan for the rest of their assets.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: mcliu on August 21, 2018, 07:30:08 AM
Haven't followed this closely, but was curious if anyone did the math on valuation pro-forma this deal?
Title: Re: AIM.TO - Aimia
Post by: KJP on August 21, 2018, 08:14:02 AM
Haven't followed this closely, but was curious if anyone did the math on valuation pro-forma this deal?

Here's one that Mittleman just released:  https://www.prnewswire.com/news-releases/mittleman-brothers-llc-statement-on-sale-of-aeroplan-300700225.html
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on August 21, 2018, 09:19:02 AM
no tax leakage... that's nice.

a billion in cash... that's nice.

even if you value the smaller odds and ends at $0, there is still significant upside... that's nice.

very highly regarded CEO at the helm, and a board that includes very experienced capital allocators... that's nice.

will be interesting to see what the company says about go forward plans.  for you canadians out there... i am assuming that the company would have to address the prefs before repurchasing common, does that sound right?

Company could pay off pfd's and debt and still have ~$2 per share in cash, which given Mittleman's view on the value of the remaining assets would likely be used to repurchase shares and close the gap... 

seems like still alot of upside here just through mittleman's incentives even if you don't agree with their valuation of the remaining assets
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on August 21, 2018, 09:21:50 AM
and Hanif Mamdani should be embarrassed by his complete inability to think strategically and remain calm under pressure.

https://business.financialpost.com/transportation/airlines/rbc-fund-urges-aimia-to-accept-bid-to-avoid-existential-crisis
Title: Re: AIM.TO - Aimia
Post by: mcliu on August 21, 2018, 11:09:28 AM
Haven't followed this closely, but was curious if anyone did the math on valuation pro-forma this deal?

Here's one that Mittleman just released:  https://www.prnewswire.com/news-releases/mittleman-brothers-llc-statement-on-sale-of-aeroplan-300700225.html

Thanks. That was fast.

What do you guys think of their valuation of PLM (C$1.3B) considering Aeroplan only sold for C$450M?
Title: Re: AIM.TO - Aimia
Post by: SnarkyPuppy on August 21, 2018, 11:37:35 AM
Haven't followed this closely, but was curious if anyone did the math on valuation pro-forma this deal?

Here's one that Mittleman just released:  https://www.prnewswire.com/news-releases/mittleman-brothers-llc-statement-on-sale-of-aeroplan-300700225.html

Thanks. That was fast.

What do you guys think of their valuation of PLM (C$1.3B) considering Aeroplan only sold for C$450M?

I'll admit I'm not very close to all of the details here, but isn't a key difference the ownership of deferred revenue liability?   

In the case of Aeroplan, Aimia had 100% ownership of the liability should there be a run on the bank.  In the case of PLM, the incentives are shared, so Aeromexico backing out of their side of the partnership to achieve fire sale price seems less likely. 

Aeromexico made a vulture bid of $180mm for aimia's stake in PLM - which was clearly a lowball and serves at a floor for valuation going forward.  This price would result in roughly -10% in mittlemans sotp - and given the context of the bid serves as a draconian downside scenario. 
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on August 21, 2018, 01:28:34 PM

[/quote]

What do you guys think of their valuation of PLM (C$1.3B) considering Aeroplan only sold for C$450M?
[/quote]

Aeroplan was a totally different ball game b/c it was a contract between Air Canada and Aeroplan, meaning that Air Canada didn't own equity in Aeroplan, so they did not care if the equity value of Aeroplan (ie Aimia) got destroyed.

In the case of PLM, AeroMexico owns half the equity, so their options are to 1) eventually pay fair value or 2) shoot themselves in their own foot and risking alienating customers by closing down their own program, only to then attempt to build another one. 

In any case, the PLM / AeroMexico contract doesn't expire for 12 years, so using Air Canada as a guide, there would be 9 years until AeroMexico would "have" to announce that they intended to shoot themselves in their own foot in order to build another program from scratch.

9 years is an eternity in the market, and my bet is that by then the company has either 1) bought back a bunch of its stock and closed the gap to NAV or 2) found something else smart to do with the cash horde that is under the watchful eye of skilled capital allocators
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 21, 2018, 01:46:35 PM
https://www.bloomberg.com/news/articles/2015-07-30/aeromexico-said-to-value-loyalty-program-at-1-billion-for-ipo (https://www.bloomberg.com/news/articles/2015-07-30/aeromexico-said-to-value-loyalty-program-at-1-billion-for-ipo)

This is an article from three years ago when Aeromexico was reportedly considering an IPO for PLM at $1B USD (AIM owns a bit less than 49% of PLM equity, Aeromexico owns the rest).  The program has continued to grow since then so its probably worth more now.  Aeromexico mgmt has also changed their mind about selling PLM according to recent conference call transcripts.

Even at $1B USD, Aimia's stake would be worth ~$630m CAD. 

FWIW,
wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 21, 2018, 03:51:41 PM
The valuation of frequent flyer programs (like PLM) is not exact science. But, in the right circumstances, they can be significant profit units.

Key inputs:

-Who has ownership control?
-Is the program well run and growing?
-Is there a long-term contract in place with the anchor partner?
-Is there a redemption mismatch vs funded costs?

Typically, EV/EBITDA and multiple to members are used.
References:
https://www.ey.com/Publication/vwLUAssets/etude-ey-sur-les-programmes-de-fidelite-des-compagnies-aeriennes/$FILE/etude-ey-sur-les-programmes-de-fidelite-des-compagnies-aeriennes.pdf
https://viewfromthewing.boardingarea.com/2016/06/30/people-forget-etihads-growth-strategy/
https://www.lek.com/sites/default/files/insights/pdf-attachments/AirlineFrequentFlyerProgram_LoyaltyProgramEffectiveness_LEK-ExecutiveInsights-1723.pdf

My understanding is that market multiples have come down since 2012 and, since 2015, this trend has likely been mitigated by growth at PLM, in terms of market value.

For the foreseeable future, incentives are aligned between AIM and AeroMexico to maintain and build value, whether through distributions or retained earnings. The major disadvantage for Aimia is that they won't tightly control the value realization of that component.

Interesting because, for the PLM investment, they end up in a spot that is not unlike their preferred equity in the capital structure, ie stranded.
Title: Re: AIM.TO - Aimia
Post by: Aqul on August 24, 2018, 01:58:52 PM
Why is this still trading so low? If you apply a 7x multiple to 2017 EBITDA for PLM, you get a NAV for AIM around $6.50. At the current price, it seems the market is valuing PLM at next-to-nothing.

The common might even be a better risk-reward now compared to a few weeks ago, as the 'run-on-the-bank-risk' has been transferred to Air Canada's balance sheet. Pro-Forma for the transaction, the NAV (excl. PLM) is comprised of cash and cash equivalents. Am I missing something? Or is it mainly because the market doesn't see a catalyst to unlocking the value in PLM? MIM's presence on the board suggests something should happen fairly soon.
Title: Re: AIM.TO - Aimia
Post by: samwise on August 24, 2018, 02:31:52 PM
It seems as if PLM is priced at 2-3x EBITDA. But the risk is what the plan for the cash is. I dont think there is substantial deal risk here.
Title: Re: AIM.TO - Aimia
Post by: Aqul on August 27, 2018, 09:09:58 AM
Yes, I'm getting just under 2x, which should be well below any reasonably fair multiple. The implied value of PLM is currently below the low-ball offer made by Aeromexico, which seems strange.
Title: Re: AIM.TO - Aimia
Post by: KFRCanuk on August 27, 2018, 11:18:21 AM
Aimia appoints new president and chief strategy officer in wake of Aeroplan deal
https://business.financialpost.com/transportation/airlines/aimia-adds-new-president-and-chief-strategy-officer-in-wake-of-aeroplan-deal
Title: Re: AIM.TO - Aimia
Post by: NewbieD on August 27, 2018, 11:41:31 AM
Would be interested to have feedback on thoughts of their allocation plans. The order I would use the capital:
- Share repurchase. Instant value creation and I see nothing stopping this post Aeroplan sale, at least to the tune of a couple hundred million.
- Sell CDLX and repurchase common. Does this have any strategic significance? Seems they could place their shares at a 5-10% discount and be happy.
- Further asset sales (PLM/AirAsia). The appointment of mr Felsher seems consistent with this?
- Pref repurchase ~ Yes, they have a higher cost than cash but << equity.
- Cash dividend. Might make sense as an end goal, but not likely before more value creating actions have been done?

Unlikely:
- Strategic investments: can they increase/add ownership of something at a good price? Maybe - but hard to switch MO.

Hoping to clear up that a cash dividend is unlikely short-term since I know I don't understand tax implications for me, a EU investor. Once realized a quick +40% upside in a danish stock only to be slapped with a tax that took all upside away, so trying to not repeat that.

For the moment I feel happy mostly holding the common rather than the pref since value realization there might not be as quick and certain as for instance a recent seeking alpha article argues.
Title: Re: AIM.TO - Aimia
Post by: kab60 on August 27, 2018, 11:43:30 AM
Seems like the market expects that the incoming cash will be used for M&A. Maybe that requires a discount. And then one probably needs to capitalize corporate expenses, no? Still does look cheap. Setup probably better than it has been in a long time.
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on August 27, 2018, 11:53:54 AM
They definitely can't pay dividends to the common, and probably can't buy it back either, until they restart the pref dividends.

I agree buybacks on a road to an eventual liquidation would be the best choice here, and suspect that now that they are cashed up they probably could squeeze  a better price for Mexico/Air Asia assets.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 27, 2018, 05:21:07 PM
The interest in this was a liquidating scenario but it seems that Aimia is planning for the long run.
I've done some work on range of values for a "pro-forma" balance sheet after the transfer of Aeroplan assets and liabilities to AC.

The equity appears to be negative (my mid-range number lower than last reported) and suspect that this factor only (in the context of their June 2016 suspension announcement) would prevent dividends and repurchases of any kind.



Title: Re: AIM.TO - Aimia
Post by: Homestead31 on August 28, 2018, 10:28:24 AM
based on Mittleman's operating history and belief that the NAV is ~$6.38 per share (based on the calcs in his open letter, adjusted for $450M aeroplan price), i think it is highly likely that a repurchase plan to shrink the NAV discount will be in the cards. 

if they were to retire all PFDs debt and pension they'd have ~$275M in cash.  They could use $100M of that on buybacks and still have plenty of cushion to consider strategic M&A, while selling off some of the smaller pieces if they just wanted to focus on PLM.

if they did pay off all liabilities and did a tender for $100M at $4.50 (probably low, but given stock is at $4.06 right now, not crazy) NAV/share would jump to $7.19 (based on Mittleman's assumptions)

from there, a $6 stock price is probably conservative given that holding cos typically trade at a discount to NAV.

all of the above is just back of the envelope and there are a million ways to think about it.  from my perspective though,  the right way to think about it is that this is basically cash and disposable assets (that are likely to increase in value) at a large discount, in the hands of capable capital allocators that will want to see the discount to NAV close.  Seems like a pretty simple path to 25-50% upside over the next year or 2, and given that its basically a cash shell with growing assets, the downside should be pretty limited, so it seems like an attractive place to be given where we are in the cycle.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on November 14, 2018, 01:20:06 PM
Q3 results have been released this AM. No operational surprise.
Negotiations appear to be underway to complete the previously announced agreement to buy Aeroplan before year-end.

-Odds of completing the transaction appear high.
-There is even a possibility that AC extends an offer to buy the whole thing (likelihood?).
-PLM continues to perform strongly and to show potential.

It seems that I'm missing something when assessing a component of the transaction. In the initial release, it was mentioned: "The aggregate purchase price consists of $450 million in cash and is on a cash-free, debt-free basis and includes the assumption of approximately $1.9 billion of Aeroplan Miles liability."

Even if this is cash-free and debt-free isn't it expected that AC will try (request? require?) to get the residual and "current" deferred revenue (about 900M) to be funded by the seller (discounted to about 500M)?
Title: Re: AIM.TO - Aimia
Post by: Aqul on November 29, 2018, 12:12:28 PM
Anyone interested at these levels? Risk-reward looks unusually good. Their Chief Strategy Officer hire just departed, which indicates they are looking to unwind the assets rather than turning it into an investment vehicle. I honestly prefer that...

We also know that AC will assume negative working capital and underfunded pension liabilities. The negative working capital component might include some of the restricted cash that I am assuming in my SOTP, but the overall impact should be minor. 
Title: Re: AIM.TO - Aimia
Post by: writser on November 29, 2018, 12:31:19 PM
Anyone interested at these levels? Risk-reward looks unusually good. Their Chief Strategy Officer hire just departed, which indicates they are looking to unwind the assets rather than turning it into an investment vehicle. I honestly prefer that...

Interesting, that was the guy they just hired a few months ago, right?
Title: Re: AIM.TO - Aimia
Post by: wabuffo on November 29, 2018, 12:35:05 PM
...indicates they are looking to unwind the assets rather than turning it into an investment vehicle. I honestly prefer that...

Do you have a good handle on exit/wind-down costs if they liquidate?  Air Canada will pick up much of the administrative/customer support staff, but will leave in place much of the very expensively-compensated mid-level and senior level management.

Just looking over their financials - there appear to be quite a few one-timers that will add up:
1) they have lease commitments of $67m - perhaps AC will might pick up the call centre lease, but I'm sure they're not picking up the HQ office lease in downtown Mtl or the other satellite office leases around the world.
2) they also have commitments for technology infrastructure of $123m and marketing support of $112m.  From a quick glance, these look like cash costs they are paying every quarter.
3) I'd have to look at the mgmt info circular - but we'll have to factor in executive separation costs as well as stay bonuses for key personnel during the wind-down period.  But a placeholder of $30m-50m might be a good SWAG til those details are released by the company.
4) In pension and other liabilities, it looks like they've booked a dividend accrual for the common dividend they declared but cancelled in mid-2017 of $30.5m.  It makes it sound like this is a cash commitment beyond the unpaid preferred dividend accruals that they will have to pay to shareholders of record at that time before they can make any liquidating distributions to the equity.  So if you bought after June 2017, that cash isn't coming to you but to a shareholder who sold to you.
5) Finally, there's going to be a cash burn while they wind-down.  We'll have to wait and see details on the transition plan to AC, but once the gross billings start flowing to AC, they will have little in the way of incoming cash flows beyond what they get from their investments.

You add all of that up and it could be up to $3 per share BEFORE the debt and preferreds make-whole payments.

Not saying that there isn't potential upside, but all of the sum-of-the-parts that I've seen on VIC, from Mittleman, etc -- ignore all of these costs/expenses because they assume a quick jump from steady-state A to steady-state B.  I'm worried that it's the transition part in the middle that will bleed quite a bit of cash.  This was not a very cost-conscious culture and had a habit of making expensive commitments and poor capital structure/allocation decisions.  I really worry about the cash expense of dealing with those hidden costs in a liquidation scenario.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Aqul on November 30, 2018, 09:39:09 AM
...indicates they are looking to unwind the assets rather than turning it into an investment vehicle. I honestly prefer that...

Do you have a good handle on exit/wind-down costs if they liquidate?  Air Canada will pick up much of the administrative/customer support staff, but will leave in place much of the very expensively-compensated mid-level and senior level management.

Just looking over their financials - there appear to be quite a few one-timers that will add up:
1) they have lease commitments of $67m - perhaps AC will might pick up the call centre lease, but I'm sure they're not picking up the HQ office lease in downtown Mtl or the other satellite office leases around the world.
2) they also have commitments for technology infrastructure of $123m and marketing support of $112m.  From a quick glance, these look like cash costs they are paying every quarter.
3) I'd have to look at the mgmt info circular - but we'll have to factor in executive separation costs as well as stay bonuses for key personnel during the wind-down period.  But a placeholder of $30m-50m might be a good SWAG til those details are released by the company.
4) In pension and other liabilities, it looks like they've booked a dividend accrual for the common dividend they declared but cancelled in mid-2017 of $30.5m.  It makes it sound like this is a cash commitment beyond the unpaid preferred dividend accruals that they will have to pay to shareholders of record at that time before they can make any liquidating distributions to the equity.  So if you bought after June 2017, that cash isn't coming to you but to a shareholder who sold to you.
5) Finally, there's going to be a cash burn while they wind-down.  We'll have to wait and see details on the transition plan to AC, but once the gross billings start flowing to AC, they will have little in the way of incoming cash flows beyond what they get from their investments.

You add all of that up and it could be up to $3 per share BEFORE the debt and preferreds make-whole payments.

Not saying that there isn't potential upside, but all of the sum-of-the-parts that I've seen on VIC, from Mittleman, etc -- ignore all of these costs/expenses because they assume a quick jump from steady-state A to steady-state B.  I'm worried that it's the transition part in the middle that will bleed quite a bit of cash.  This was not a very cost-conscious culture and had a habit of making expensive commitments and poor capital structure/allocation decisions.  I really worry about the cash expense of dealing with those hidden costs in a liquidation scenario.

wabuffo

Good points, but I think you are being overly punitive. If PLM is worth 9x 2017 EBITDA, then you have a buffer of ~325mm CAD between the implied value of the equity and the current market cap. It is EXTREMELY unlikely that you will burn that much cash in a liquidation. Most of the operating commitments should leave with Aeroplan off Aimia's balance sheets, but I guess we will need to wait for final confirmation for management. I have already included both the accrued preferred and common dividends in my SOTP.

Not to mention, ILS might have positive value if it is sold off.
Title: Re: AIM.TO - Aimia
Post by: NewbieD on January 10, 2019, 06:47:46 AM
So they repurchased 250m. Looks like your extrapolation from the strategy officer leaving was right, Agul.

What's next then - repurchase offer?
Title: Re: AIM.TO - Aimia
Post by: samwise on January 10, 2019, 05:59:00 PM
Buyback prefs at a discount from the holder who owns 1/3rd of a illiquid issue?
Title: Re: AIM.TO - Aimia
Post by: Aqul on January 15, 2019, 07:11:40 PM
Retiring the debt was a great move to avoid leakage through interest payments. I guess they need to decide now whether they want to liquidate or deploy their remaining capital. If the latter, it might make sense to keep the preferred in place. I would much rather take the quick return of a liquidation, though.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 26, 2019, 05:01:55 PM
Last June 2017, I agreed with management about the dividend cut (both common and preferred) but their CBCA section 42b argument felt fuzzy.
https://www.advisor.ca/columnists_/al-and-mark-rosen/can-a-board-be-legally-forced-to-cut-dividends/

Since then, a lot of water has run under the bridge and, because of insufficient confidence in opposing forces and the potential for value destruction, I left money on the table and didn't get to vote last January but progress has been made and, recently, have voted with my feet in the C, B and A sections. Isn't it supposed to be about buying low and selling high? When facts change...
https://www.aimia.com/newsroom/news-releases/

There is still uncertainty about liquidation versus a new start and the Canadian preferred market has a life of its own but me thinks that the prefs will continue to gravitate to par but what do I know?
https://www.raymondjames.ca/branches/premium/pdfs/preferredsharesreport.pdf

Another interesting feature is that the holders of security of record on June 16th 2017 have some declared and unpaid money to make and it may be a good idea to have a laser eye on accounts as custodians at times "forget" to transfer the old coupons.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on March 24, 2019, 05:35:02 AM
Aimia continues to be, in my view, a liquidation story and the profile has evolved. What may happen can be analyzed through an arbitrage filter.

1-How likely is the liquidation and the preferred redemption at par?
I would say the likelihood is high given that the main asset has been sold and it seems to me that AeroMexico should be able to negotiate a fair price for PLM, which is the other jewel in the crown.

2-How long will the process take?
Since the Aeroplan sale, Aimia has acted rapidly to alter its stated capital rules, has decided to distribute previously declared dividends (June 2017), has re-started capital distribution, including cumulative dividends, and prominent shareholders have asked for a clear path and have a standstill agreement which finishes on July 1st, 2019.

3-Any upside above par value?
Unlikely and limited but a rapid and satisfactory liquidation process may cause them to buy the prefs at a slight premium in order to save on the dividends. 

4-What if Aimia doesn't liquidate for whatever reason including an uncertain path to a "new" Aimia?
That is a tough one in part because it is hard to see the outside appetite for the assets remaining within the corporate structure. However, even without a liquidation, IMO downside is limited for the stranded preferreds because of a quite large margin of safety (even if "transition" costs that wabuffo has described are taken into account) if the preferreds are seen as fixed income and because Aimia, as a going concern, would continue to hold valuable tax assets.

Here's a slightly dated report that focuses on the common shareholder's perspective:
http://www.mittlemanbrothers.com/wp-content/uploads/2018/11/Value-Investor-Insight-Aimia-10-31-18.pdf
Title: Re: AIM.TO - Aimia
Post by: wabuffo on March 24, 2019, 01:14:28 PM
I was a little surprised that they paid out the deferred preferred dividends and common dividend without announcing what their business strategy was going to be.  I'm concerned that it just reflects confusion/disagreement by the BOD on the path forward now that the Aeroplan business has been sold.

Mittleman appears to be arguing in favor of a conservation of cash while searching for profitable acquisition candidates that can use the NOLs.  But if they were pursuing that strategy, that would argue against making the preferreds current in order to husband all the cash possible towards an asset purchase.   Stranding the preferreds turns them into a PIK/zero coupon type of liability that will grow with time but that one can payoff or restructure further down the road once the business strategy has been fully implemented.

Otherwise, if you are going to liquidate, then make the preferreds current and pay them off.  Otherwise, every quarter that goes by, you owe more cash that isn't going into a liquidation.   Overall, this feels like a half-a-loaf strategy that burns cash while delaying the decision about which business strategy is going to be pursued.  Very underwhelming performance by AIMIA's BOD so far.

Perhaps we'll learn more this week when 'earnings' are released on the 28th.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: samwise on March 24, 2019, 07:24:34 PM
I was a little surprised that they paid out the deferred preferred dividends and common dividend without announcing what their business strategy was going to be.  I'm concerned that it just reflects confusion/disagreement by the BOD on the path forward now that the Aeroplan business has been sold.

Mittleman appears to be arguing in favor of a conservation of cash while searching for profitable acquisition candidates that can use the NOLs.  But if they were pursuing that strategy, that would argue against making the preferreds current in order to husband all the cash possible towards an asset purchase.   Stranding the preferreds turns them into a PIK/zero coupon type of liability that will grow with time but that one can payoff or restructure further down the road once the business strategy has been fully implemented.

Otherwise, if you are going to liquidate, then make the preferreds current and pay them off.  Otherwise, every quarter that goes by, you owe more cash that isn't going into a liquidation.   Overall, this feels like a half-a-loaf strategy that burns cash while delaying the decision about which business strategy is going to be pursued.  Very underwhelming performance by AIMIA's BOD so far.

Perhaps we'll learn more this week when 'earnings' are released on the 28th.

wabuffo

Maybe they want to to a tender offer first? I agree that they need to either liquidate fast or invest the cash for a compounded return, while financing with deferred simple interest (i.e. Strand the preferreds). But in either case a buyback will enhance value, and the biggest shareholder has argued for buybacks under a price of 5.

If they don't do buybacks now, then paying the dividends out of cash just reduces value over time.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on March 28, 2019, 04:55:38 AM
Aimia has decided not to liquidate.
I don't like the stranded status but the balance sheet of the equation at least gives some comfort for some time.

The breakage assumption change at PLM crystallizes past cashflows that have occurred and needed to be recognized which hurts present results but points to a growing and active customer base with strong potential recurring revenues. PLM continues to have value but it has a similar risk profile as the previous AC partnership.

The recent announcement has a slight big-bath taste to it which is fair game under the circumstances.

I think the common share buyback announcement is reasonable and leaves residual financial flexibility.

The new team definitely has a different mindset than the previous team and that comes with its own risk and reward profile.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on March 28, 2019, 09:19:07 AM
I'm not a big fan of businesses that burn a lot of cash while trying to start up new businesses.   The 'core' business (ex-Aeroplan) appears to have annual outflows of cash = $89m CAD.  While $21m CAD of annual cash interest expense goes away, they have now committed themselves to $17m CAD of preferred dividends.  That pegs go-forward cash burn around $85m per year.

I'm still wondering why they made the preferreds current and paid another $30m for a declared-but-no-paid common.  Was it to allow them to buy back stock?  Why in the world would one buy back stock with a near-$100m cash burn and a desire to use cash to make investments? 

Not sure I trust this management team to execute well.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on April 02, 2019, 08:29:47 AM
https://seekingalpha.com/article/4251540-laughing-water-capital-issues-open-letter-board-aimia-inc

https://seekingalpha.com/article/4251791-laughing-water-capital-issues-second-open-letter-board-aimia-inc
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on April 02, 2019, 10:17:50 AM
The Mittleman brothers appear to be the driving force behind the transformation.
Why don't they organize to buy the whole thing as all public listed securities are trading at a discount?

Maybe it's a timing issue but there seems to be an opportunity after the buyback.

The Mittleman brothers have been involved with Revlon and may have learned a trick or two from Ron Perelman, in terms of dealing with holders of non-controlling securities.
Title: Re: AIM.TO - Aimia
Post by: Uccmal on April 03, 2019, 05:27:03 AM
Okay, I need some confirmation with this. 

In my accounts this morning I received a payment from Aimia. 

I last held Aimia shares 2 yrs ago.  I stopped following the saga a long time ago. 

So, is this my deferred payment from the shares I held? 

Y/N? 
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on April 03, 2019, 05:50:01 AM
Okay, I need some confirmation with this. 

In my accounts this morning I received a payment from Aimia. 

I last held Aimia shares 2 yrs ago.  I stopped following the saga a long time ago. 

So, is this my deferred payment from the shares I held? 

Y/N?
1-Dividends to be paid to holders of record on June 16, 2017 were suspended after Air Canada caused AIM enterprise value to come down.
2-After the dust settled, Air Canada bought the Aeroplan franchise with a large discount.
3-With cash received, Aimia decided to re-instate capital distribution and to pay the June 16, 2017 dividends and those settled in individual accounts today for many.
4-End of story?
Title: Re: AIM.TO - Aimia
Post by: Uccmal on April 03, 2019, 06:33:45 AM
Okay, I need some confirmation with this. 

In my accounts this morning I received a payment from Aimia. 

I last held Aimia shares 2 yrs ago.  I stopped following the saga a long time ago. 

So, is this my deferred payment from the shares I held? 

Y/N?
1-Dividends to be paid to holders of record on June 16, 2017 were suspended after Air Canada caused AIM enterprise value to come down.
2-After the dust settled, Air Canada bought the Aeroplan franchise with a large discount.
3-With cash received, Aimia decided to re-instate capital distribution and to pay the June 16, 2017 dividends and those settled in individual accounts today for many.
4-End of story?

Thankyou. 

uhm, I should have said they were the prefs. 
Title: Re: AIM.TO - Aimia
Post by: NewbieD on April 09, 2019, 03:56:37 AM
So the terms of the buyback of shares have been announced. ~26% of the outstanding shares, assuming a price at the floor of the 3.8 CAD will be bought. Mittleman brothers have announced they will participate so it will be 1/3rd or so of the shares excluding theirs that will be bought assuming a price of 3.80. My guess is the price will be closer to 4.50 than 3.80 since people assumingly hold shares to make money and it's trading today at above 4 CAD.

I bought back in on this announcemant at CAD 4. Interesting set-up from a game theoretical perspective. It seems advantageous to wait to decide your action until just before the offer closes unless you believe the offer is so attractive it will fill upp quickly. To be honest I don't know how to tender my shares or if my broker will help even help out. Since Mittlemans have been good stewards so far as I can tell so I'll be happy not to participate and don't mind if the settled price is low since it'll create more value albeit with a slower payout for me.

Are there any tax implications of depositing shares in this kind of process?

Is this offer just a stepping stone on the path to a liquidation in which the main owners are trying to capture a larger part of the value while the market is uncertain of PLMs value? Or do they really plan to develop PLM long-term?
Title: Re: AIM.TO - Aimia
Post by: SnarkyPuppy on April 09, 2019, 09:53:55 AM
I'm mobile so don't have time to respond further - but mittleman is NOT participating. 
Title: Re: AIM.TO - Aimia
Post by: NewbieD on April 09, 2019, 11:10:25 AM
Yes, right. That was implied by my conclusion though missed the word not in one place..
Title: Re: AIM.TO - Aimia
Post by: SnarkyPuppy on April 09, 2019, 11:36:42 AM
Yes, right. That was implied by my conclusion though missed the word not in one place..

My bad- truthfully just saw that statement and stopped reading.  8)
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on April 09, 2019, 08:05:01 PM
So the terms of the buyback of shares have been announced. ~26% of the outstanding shares, assuming a price at the floor of the 3.8 CAD will be bought. Mittleman brothers have announced they will participate so it will be 1/3rd or so of the shares excluding theirs that will be bought assuming a price of 3.80. My guess is the price will be closer to 4.50 than 3.80 since people assumingly hold shares to make money and it's trading today at above 4 CAD.

I bought back in on this announcemant at CAD 4. Interesting set-up from a game theoretical perspective. 1-It seems advantageous to wait to decide your action until just before the offer closes unless you believe the offer is so attractive it will fill upp quickly. 2-To be honest I don't know how to tender my shares or if my broker will help even help out. Since Mittlemans have been good stewards so far as I can tell so I'll be happy not to participate and don't mind if the settled price is low since it'll create more value albeit with a slower payout for me.

3-Are there any tax implications of depositing shares in this kind of process?

4-Is this offer just a stepping stone on the path to a liquidation in which the main owners are trying to capture a larger part of the value while the market is uncertain of PLMs value? Or do they really plan to develop PLM long-term?

Not a specialist in modified Dutch Auctions but tendered shares in such a process in 2012 (this was the second mod. Dutch Auction the firm was doing in 3 years, using "excess" cash, only to go in distressed liquidation 3 to 4 years later!).

1-I understand that this is not on a first come, first served basis; the purchase price is decided at the end and, if extra shares have been tendered, a pro-rata calculation is used.
2-Not sure how it would work for you as a European but, if you want to tender, you would have to tell your broker the number of shares and the option you choose (out of the 3 spelled out) and, if applicable the price at which you would accept tendering. The procedure itself  should be carried out by the broker.
3-If you participate, the shares not purchased will be returned to your accounts.
4-The reasonable course for Aimia, in order to maximize enterprise value since 2017, has been to liquidate, which they have done in a very non-linear fashion and I think that they should continue in that direction but the process may not be linear. Like you say, this has been an "interesting set-up from a game theoretical perspective".
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on May 15, 2019, 05:01:08 AM
There continues to be potential closing of the mismatch between value and quoted securities along the capital structure with potential catalysts and the main risk being that the company continues to burn cash during the 'transformation'.

The Mittleman brothers' standstill agreement ends in early July and the recent bid for WestJet by Gerry Schwarz-led Onex raises the possibility that the new entity's loyalty unit may involve part or all of Aimia somehow.

For PLM valuation purposes, in 2003, Mr. Schwarz had offered a conservative offer for 35% of Aeroplan ("gem") with a 1.2x gross billings and 8x EBITDA parameters. PLM's gross billings for 2019 should be around 260M (USD) and EBITDA should be around 85M (USD). PLM is comparable to Aeroplan but differs in its growth prospects which more than compensate expected declining EBITDA margins. With a slight control premium, Aimia's stake in PLM should be worth between 350 to 450M (CDN).

Also, the Cardlytics stake has been going up in value on strong results and wonder if Mr. Mamdani will remain a passive investor.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on May 23, 2019, 09:04:33 AM
https://www.aimia.com/newsroom/news-releases/ (https://www.aimia.com/newsroom/news-releases/)

Aimia buys back a bit less than 23% of its common shares o/s at $4.30 per share.   Stock now trading at $3.73.  Oh well.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on May 23, 2019, 09:59:42 AM
I guess the value is in the eye of the beholder (to be holder?)
Mittleman Investment Management bought a significant chunk of shares at 3.85 to 3.86 yesterday.

An interesting corollary of the auction process is that a threshold is being defined for privatization.
If too much of a mouthful, the investor who holds 60% of preferred shares could participate in the acquisition in exchange for a post-acquisition dividend.
Title: Re: AIM.TO - Aimia
Post by: movys on May 23, 2019, 10:34:19 AM
The offering was oversubscribed so I think much of the selling over the past two days are from holders who were involved for the TO, got pro-rated, and are now dumping.
Title: Re: AIM.TO - Aimia
Post by: deseretalts on May 23, 2019, 02:36:44 PM
Where did you see that Mittleman was adding?
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on May 23, 2019, 03:19:45 PM
Where did you see that Mittleman was adding?
See canadianinsider.com
I just saw that they filed today for an additional 500 000 shares bought yesterday at 2.82 (USD).
A million here, a million there, soon we may be talking real money. :)
Title: Re: AIM.TO - Aimia
Post by: samwise on May 23, 2019, 06:01:22 PM
Here's a slightly dated report that focuses on the common shareholder's perspective:
http://www.mittlemanbrothers.com/wp-content/uploads/2018/11/Value-Investor-Insight-Aimia-10-31-18.pdf

This link mentions C$650 million in losses which can be netted against **investment** gains. Another $150 of US NOLs.

I'm not familiar with Canadian corporate taxation, but if it's like that for individuals, that means the 650 is only for capital gains generated by buying and selling businesses or securities, not for ongoing business income. I couldn't find any confirmation in Aimia's financials. Anyone has any experience or expertise here?

If that's true then it seems like this going to be Mittleman's permanent capital vehicle. They could trade like senvest, permanently at 50% of NAV.

If they can compound the cash, they also have the option of not paying the prefs (see DTLA, possibly TOO prefs). Prefs go from being floating rate (cash at 100% of face) to a zero coupon bond ( worth say 40% of face). The prefs are cumulative but not PIK, which would make them compound. There seems to be some tax implications they mention in their latest quarterly. Is the tax still payable if they don't pay the pref dividend? Any credit experts and tax experts who can opine on this?

Biggest risk now is that they are forced to agree with some value destroying plan as they have to vote with management at the next AGM.

Next risk is they force out minorities for cheap. ( Again see TOO).

Then the risk is that they screw up the investments.(recent performance isn't great)

Finally, the market always keep them at a discount (senvest)

I think they could create value by just investing in an S&P etf and turning off the prefs. Get compounding value , but pay simple interest once at the end. Same idea as an RRSP. The more leverage you get from the prefs, the better the percentage returns for the equity.

So even more buybacks would make sense here. Extreme case AIM are investing borrowed money and none of their own. I don't think the prefs are protected from that possibility.

Management has to just stop giving money away as they just did with HSBC.
Title: Re: AIM.TO - Aimia
Post by: NewbieD on May 24, 2019, 01:12:10 AM
Here's a slightly dated report that focuses on the common shareholder's perspective:
http://www.mittlemanbrothers.com/wp-content/uploads/2018/11/Value-Investor-Insight-Aimia-10-31-18.pdf

This link mentions C$650 million in losses which can be netted against **investment** gains. Another $150 of US NOLs.


If they can compound the cash, they also have the option of not paying the prefs (see DTLA, possibly TOO prefs). Prefs go from being floating rate (cash at 100% of face) to a zero coupon bond ( worth say 40% of face).

...[]...

I think they could create value by just investing in an S&P etf and turning off the prefs. Get compounding value , but pay simple interest once at the end. Same idea as an RRSP. The more leverage you get from the prefs, the better the percentage returns for the equity.


No knowledge on the tax loss rules. On the surface this pref idea seems like a good route. That is if you don't care about screwing part of your capital structure. Do you think they'd be comfortable with this given possible long term implications to themselves raising money? What happened in the cases you mention? Guess you write about S&P as a thought experiment, don't think any activist investor would go for that:)

Regarding investments. AIM has formed an investment commitee. The plan from mgmt seems clear - to grow through M&A in the loyalty business. At least they put some profitability criteria in.

Agree that more buybacks seems sensible unless they find something truly cheap to buy. But it will make it take a long time to use the tax credits, so not sure how agressive they will go with this.

Selling the Cardlytics stake and buyback or buy something yielding profits would make sense unless they believe it's clearly undervalued.

Does Mittleman have any record of exploiting minorities?
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on May 24, 2019, 08:29:09 AM
1-income tax paid on preferred dividends showing how present capital structure is inefficient
The idea behind Part VI.1 tax is the expectation by tax authorities that dividends are paid with after-tax profits. Since profitability for the operating entity is theoretical and future-looking, when dividends will be paid on preferred shares, tax will be paid and will be carried forward as non-capital losses for up to seven years, to be used against operating taxable income. What remains to be explained is the 40% rate. I understand that the basic rate is 25% but firms can elect for the 40% rate. Since this is equivalent to paying tax in advance, this would only make some sense if a rapid and significant return to operating profitability is achieved and even then. Using the 40% rate now only seems to make sense from the point of view of the dividend payee who is a corporation and then does not have to pay an extra 10% upon reception of the dividend. Given the present capital structure based on a large amount of preferred shares as equity, the unfavorable tax treatment and the uncertain outlook for return to operating profitability, I think the stranded status has less value for common shareholders (and the Board).

2-Mittleman Investment Management involvement and what it may mean for capital structure
There are risks that the firm somehow muddles through some kind of transition and value in the capital structure may end up dissipated or channelled. I think the Mittleman brothers will play a significant role and would say it's unlikely that they exploit minorities or the stranded scenario. Aimia will tend to look like a holding of investments and, from a humble perspective, the preferred share prominent position in the equity would be very unusual (and tax inefficient, see above) for such a vehicle. The performance at the investment management firm has been relatively poor in the last few years but they are basically patient contrarian value guys who typically try to make money from intrinsic value discrepancies. They have not so far been involved in controlling stakes with implied control premiums but Aimia is a different story. I would say that the Mittleman people have been too optimistic with Aimia but their appraisal is still well above where the market is marking the value at this point. In the past, thay have been involved on the minority side and, for instance, have voiced concerns about the potential predatory behavior of Ron Perelman with Revlon. Unlike the DTLA and the TOO scenarios where actors would actually take advantage of situations thay have contributed in creating, I think the Mittleman firm is likely to play the game fairly to promote value realization.

I guess we'll just have to see and the next few weeks may provide some answers.
Title: Re: AIM.TO - Aimia
Post by: samwise on May 24, 2019, 09:03:24 PM

No knowledge on the tax loss rules. On the surface this pref idea seems like a good route. That is if you don't care about screwing part of your capital structure. Do you think they'd be comfortable with this given possible long term implications to themselves raising money? What happened in the cases you mention? Guess you write about S&P as a thought experiment, don't think any activist investor would go for that:)
.

Does Mittleman have any record of exploiting minorities?

I am not sure if Mittleman has ever had the opportunity or temptation to exploit minority shareholders or separate layers of capital structure. I do know it would weaken their moral position against Perelman in Revlon ( rhetorical question: is the moral high ground a good defence against a shark?).

Long term implications for BAM have been nil, AFAIK. They sell returns to their LPs not manners.

I don't expect them to buy ETFs, but it would eliminate stock selection risks from the evaluation. Seems a safer option than more Revlon and AMC.
Title: Re: AIM.TO - Aimia
Post by: samwise on May 24, 2019, 09:43:29 PM
I guess we'll just have to see and the next few weeks may provide some answers.

Yes. July 1 is when the standstill expires. We will find out what their next move is.

BTW, here are some plans of Mittelman about Rabe, in case you haven't seen them.

https://stockhouse.com/companies/bullboard?symbol=t.aim&threadid=29669782

So far this is what I understood about the tax. The effective rate for borrowing is 40% higher than the coupon rate. But it could still be deferred along with the dividends. The tax seems to be paid, when preferred dividends are paid. Just makes for a higher hurdle rate in stranding the preferred: you'd want your investments to beat the cost of borrowing.

They could always try to tender for preferreds. Mr. Mamdani might be happy to sell for $18, about a 50% profit. On a position that must be very hard to sell. Unless he sold over the last few months. This is less valuable than stranding them and using the "float", but it might be more palatable and invite less lawsuits.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on May 25, 2019, 06:48:45 AM
I guess we'll just have to see and the next few weeks may provide some answers.
Yes. July 1 is when the standstill expires. We will find out what their next move is.
The preferred capital is technically permanent but distributions in that direction will continue to be relatively unavoidable especially if further deemed capital distributions are considered and if the entity becomes focused on the management of other people's money.

In the meantime and for the foreseeable future, the cost of the stranded float will be between 6.3 and 8.4% per year.

Last I heard, Mr. Mamdani had 60% of preferreds and, given trading volumes lately, it's unlikely that this % has changed significantly.
I assume the key players are talking together and not simply waiting to start a fight this summer.
FWIW, with Mr. Rovinescu out of the picture, it may be easier to get a more balanced end game.
Title: Re: AIM.TO - Aimia
Post by: samwise on June 03, 2019, 08:22:32 PM
The tender was oversubscribed, and the rejected shares were sold down aggressively last week. I used the opportunity to buy some more.

Meanwhile the company has announced
1. More cash received for aeroplan due to working capital adjustments.
2. Release of restricted cash as the CRA issues are resolved.
3. An share buyback, starting June 6.

https://www.newswire.ca/news-releases/aimia-finalizes-post-closing-adjustments-resulting-in-final-aeroplan-sale-price-of-516-million-810652133.html

https://www.newswire.ca/news-releases/aimia-announces-normal-course-issuer-bid-to-repurchase-up-to-8-9-million-shares-840974945.html
Title: Re: AIM.TO - Aimia
Post by: NewbieD on June 04, 2019, 07:10:31 AM
Nice to see the buyback; I also increased position last week. Would guess they implement this at the maximum allowed rate.

Thanks for sharing the link on the case, samwise - entertaining read, and informative. After reading about the IT deptmt disorg I want them to sell assets even more. Mittlemans shouldn't be happy about Felschers fate given they seemingly loved the guy.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on June 04, 2019, 09:28:09 AM
Nice to see the buyback...

More "cowbell", LOL   

wabuffo
Title: Re: AIM.TO - Aimia
Post by: wabuffo on June 17, 2019, 04:59:24 PM
This is weird news.  It's also a very weird communication process to announce that the PLM Premier CEO has been removed from his job.

https://www.newswire.ca/news-releases/mittleman-brothers-confirms-removal-of-plm-premier-ceo-801844467.html (https://www.newswire.ca/news-releases/mittleman-brothers-confirms-removal-of-plm-premier-ceo-801844467.html)

Its weird because:
1) it happened on May 15th (over a month ago).
2) there is no announcement from AIMIA (PLM is its biggest remaining asset so one would think this is material news).
3) the decision to remove the CEO came from the airline Aeromexico (which owns 51% vs AIMIA owning 49%).
4) the organization announcing it is AIMIA's largest shareholder.

How to read the tea leaves here?  CEO being fired portends bad news at PLM - or - Mittleman is angling to cut a deal with Aeromexico to sell PLM to the airline over the heads of AIMIA's CEO and BOD? What does this mean for AIMIA's strategy to be a 'curator' of loyalty programs?  In fact, what does this mean for AIMIA's CEO, Jeremy Rabe?

Seems to me that perhaps there is a major disagreement over strategy between Mittleman and the BOD of AIMIA - and Mittleman's standstill agreement expires next month, IIRC, so they are free to go activist again.

Very interesting and very weird. 

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on June 17, 2019, 06:12:35 PM
This is weird news.  It's also a very weird communication process to announce that the PLM Premier CEO has been removed from his job.

https://www.newswire.ca/news-releases/mittleman-brothers-confirms-removal-of-plm-premier-ceo-801844467.html (https://www.newswire.ca/news-releases/mittleman-brothers-confirms-removal-of-plm-premier-ceo-801844467.html)

Its weird because:
1) it happened on May 15th (over a month ago).
2) there is no announcement from AIMIA (PLM is its biggest remaining asset so one would think this is material news).
3) the decision to remove the CEO came from the airline Aeromexico (which owns 51% vs AIMIA owning 49%).
4) the organization announcing it is AIMIA's largest shareholder.

How to read the tea leaves here?  CEO being fired portends bad news at PLM - or - Mittleman is angling to cut a deal with Aeromexico to sell PLM to the airline over the heads of AIMIA's CEO and BOD? What does this mean for AIMIA's strategy to be a 'curator' of loyalty programs?  In fact, what does this mean for AIMIA's CEO, Jeremy Rabe?

Seems to me that perhaps there is a major disagreement over strategy between Mittleman and the BOD of AIMIA - and Mittleman's standstill agreement expires next month, IIRC, so they are free to go activist again.

Very interesting and very weird. 

wabuffo

taken together with the link that samwise posted previously, i think that this means that mittleman is going to go to war when their standstill expires.  personally i have serious doubts about this board of directors and their plans.  as samwise pointed out, allegations have been made that they covered up self dealing, and now we learn from mittleman brothers - not the company - that the CEO of PLM was fired.  why wouldn't the company tell shareholders taht when aeromexico told shareholders?  to me it seems like Aimia has been trying to talk up things with PLM as being better than they really are because their plan is dependent on dividends from PLM.

mittleman said in one of their earlier letters that they hoped to hold PLM forever, so i don't think this means they want to sell it.  i more think it is just them wanting other shareholders to know all the facts before the vote for the board of directors because the board doesn't seem to be sharing the whole truth.

i  know that personally i will not be voting for the board.  i can't give advice to anyone else about how they should vote, but this board has been awful in the past, doesn't own any stock, and it seems like they have been hiding facts. at least mittleman owns a lot of stock so should at least care about the stock price.
Title: Re: AIM.TO - Aimia
Post by: gokou3 on June 17, 2019, 09:59:07 PM
Don't know what to make out of the CEO firing news, but shares did shoot up today..

anyways, just writing to mention that I have voted against all the directors except Mittleman and Rabe.  (I believe the latter was brought in by Mittelman).
Title: Re: AIM.TO - Aimia
Post by: NewbieD on June 18, 2019, 01:50:49 AM
I would like to vote against everybody but Mittleman. But I have no idea how to? Is there a form somewhere?
Title: Re: AIM.TO - Aimia
Post by: Sunrider on June 18, 2019, 07:55:02 AM
I would like to vote against everybody but Mittleman. But I have no idea how to? Is there a form somewhere?
Your broker should give you that option - at IB you get emails with links for electronic voting, but your broker may be different,  or may be sending you the proxy/voting card in the mail.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on June 18, 2019, 08:38:37 AM
personally i have serious doubts about this board of directors and their plans.

I generally agree with this statement as this BOD has been surprisingly free and easy with incinerating cash.  I also notice that they have not repurchased any shares yet on their NCIB (despite paying much higher prices in their dutch auction tender). 

But I'm also skeptical about what Mittleman can accomplish here.  I think their SOTP has been surprisingly amateurish and they have made a number of mistakes and omissions in their intrinsic value calculations.  The lower cash balance (and still to be felt exit costs for much of the current bloated headcount and fixed costs) really limits their degrees of freedom if they want to build a growth platform from the ashes of the Aeroplan business.

I think the PLM Premier CEO dismissal is potentially bad news to the thesis as it signals a potential deterioration to this business (and its ultimate value). 

wabuffo

Title: Re: AIM.TO - Aimia
Post by: NewbieD on June 19, 2019, 12:48:03 AM
I would like to vote against everybody but Mittleman. But I have no idea how to? Is there a form somewhere?
Your broker should give you that option - at IB you get emails with links for electronic voting, but your broker may be different,  or may be sending you the proxy/voting card in the mail.

Thx for the info. I have a european broker that doesn't send these things. I feel bad if my passivity is helping this ****show perpetuate itself. Will try to read up on how to do this.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on June 19, 2019, 04:42:15 AM
...
But I'm also skeptical about what Mittleman can accomplish here…

I think the PLM Premier CEO dismissal is potentially bad news to the thesis as it signals a potential deterioration to this business (and its ultimate value). 

wabuffo
On a weighted probability basis, a CFO "removal" is negative but there are many potential reasons that may not be related to the valuation of PLM. It seems that the voluntary interested party disclosure was the most noise that could be made which respected the standstill agreement.

I remember having an interesting discussion with you, during an earlier phase, about the value of loyalty liabilities even when the future of core Aimia was in doubt. Having followed Club Premier for a long time and seen it grow profitably, it seems that the future is still positive. In Q4 2018, Aeromexico took a non-cash hit from a downward adjustment in breakage at PLM which may have been a negative surprise at head office and a way to interpret this development is that the loyalty program was too "generous" with customers but changing the assumption to lower breakage is a long-term sign of strength (engagement) of the program and they can progressively "tweak" the variables to make the program less "generous" (and more profitable) over time. So I wonder if you have specific reasons to question the value of PLM except for the recent CEO announcement.

Aeromexico has strong ties with Delta who has a very strong loyalty program and Delta management is possibly available to assist in operational or financial matters.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on June 19, 2019, 05:09:07 AM
Quote
I remember having an interesting discussion with you, during an earlier phase, about the value of loyalty liabilities even when the future of core Aimia was in doubt.

Yes - I remember that.  It was a great discussion and caused me to research the economics of Blue Chip Stamps in greater detail.  I still am a fan of these businesses, but I've realized that it takes a very special capital allocator to run them correctly.  Unfortunately, the culture of Aeroplan's management team was such that they really didn't understand how to manage the capital structure properly.

I have no idea what is happening at PLM, but that whole announcement looks very dysfunctional and just has me wondering if there is more bad news coming.  Perhaps not, we'll see.

I will admit that I no longer have a position in AIM so I'm just watching from the sidelines.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on June 19, 2019, 05:26:15 AM
...
But I'm also skeptical about what Mittleman can accomplish here…

I think the PLM Premier CEO dismissal is potentially bad news to the thesis as it signals a potential deterioration to this business (and its ultimate value). 

wabuffo
On a weighted probability basis, a CFO "removal" is negative but there are many potential reasons that may not be related to the valuation of PLM. It seems that the voluntary interested party disclosure was the most noise that could be made which respected the standstill agreement.

I remember having an interesting discussion with you, during an earlier phase, about the value of loyalty liabilities even when the future of core Aimia was in doubt. Having followed Club Premier for a long time and seen it grow profitably, it seems that the future is still positive. In Q4 2018, Aeromexico took a non-cash hit from a downward adjustment in breakage at PLM which may have been a negative surprise at head office and a way to interpret this development is that the loyalty program was too "generous" with customers but changing the assumption to lower breakage is a long-term sign of strength (engagement) of the program and they can progressively "tweak" the variables to make the program less "generous" (and more profitable) over time. So I wonder if you have specific reasons to question the value of PLM except for the recent CEO announcement.

Aeromexico has strong ties with Delta who has a very strong loyalty program and Delta management is possibly available to assist in operational or financial matters.

i think the firing of the CEO of PLM is a signal from Aeromexico that they are not happy with how Aimia has been talking up their influence on PLM.  Quite frankly, I think that Jeremey and Aimia have been misleading shareholders.  For example, Jeremy talked about how Aimia now has 3 board members at PLM.  What he didn't mention is that one of them - Scot Rank - was CEO of Lala Group, and the Chairman of Lala Group is on the board of Aeromexico.

is this guy really an Aimia-loyal director if his boss is on the board of Aeromexico? 

in my opinion this is just another example of the Aimia board putting their own interests in front of the interests of shareholders.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on June 19, 2019, 06:08:26 AM
Quote
I remember having an interesting discussion with you, during an earlier phase, about the value of loyalty liabilities even when the future of core Aimia was in doubt.

Yes - I remember that.  It was a great discussion and caused me to research the economics of Blue Chip Stamps in greater detail.  I still am a fan of these businesses, but I've realized that it takes a very special capital allocator to run them correctly.  Unfortunately, the culture of Aeroplan's management team was such that they really didn't understand how to manage the capital structure properly.

I have no idea what is happening at PLM, but that whole announcement looks very dysfunctional and just has me wondering if there is more bad news coming.  Perhaps not, we'll see.

I will admit that I no longer have a position in AIM so I'm just watching from the sidelines.

wabuffo
I partly disagree with the bolded part. The conclusion I come up with is that Aimia then distributed way too much capital while wildly underestimating the risk of Air Canada not renewing. The sustainability of the business and truncated capital structure relied on the maintenance of the tie with Air Canada. I would say Mr. Rovinescu understood that part very well.
This is a reason why the PLM 49% joint venture structure with Aeromexico and 2030 management contract offers more value protection.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on June 19, 2019, 06:43:37 AM
I partly disagree with the bolded part. The conclusion I come up with is that Aimia then distributed way too much capital while wildly underestimating the risk of Air Canada not renewing.

We're agreeing.   When I say capital structure, what I mean is that Aeroplan was a float-business and as such, they needed to use the float as capital (and not income).  While the float lasts, you have to conserve cash and build up the asset side of the business with high ROI investments.  It helps if the universe of investments isn't limited to other loyalty businesses.

Instead, this management team came out in an investment trust public company structure which forced distribution of an extremely high percentage of the float-based free cash flows.  Then the Aeroplan BOD/mgmt team used debt and preferred issuance to make mediocre investments in other loyalty businesses.

Whether one needed to plan for Air Canada coming back and not renewing, that's an open point for me.  But if the balance sheet was properly set up with quality investment assets that produced their own free cash flow, then Aeroplan's negotiating stance would've been stronger.  I also think an astute Aeroplan mgmt team would've squeezed the banks since they stood to lose their investment in Aeroplan cards that had achieved front-of-wallet spending status for the consumers that had them.  Instead there was all this panic-selling and squandering of assets.

But that's all Monday-morning QB-ing now.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on June 20, 2019, 06:18:43 AM
Also interesting to note that they changed the director's skills matrix in the proxy.

last year there was a column for M&A experience.  Neither the CEO nor the Chairman checked off that they had M&A experience.

Now the company has announced that they are going with a strategy that is entirely tied to M&A if it is going to succeed, and magically the director skills matrix in this years proxy has changed so that M&A is lumped together with Capital Markets  experience.  This allows the Chairman (McEwan) to check the box.

In my opinion this is another example of a board that owns basically no stock putting their own interests ahead of shareholders.  its really kind of unbelievable.
Title: Re: AIM.TO - Aimia
Post by: movys on June 24, 2019, 08:58:32 AM
personally i have serious doubts about this board of directors and their plans.

I generally agree with this statement as this BOD has been surprisingly free and easy with incinerating cash.  I also notice that they have not repurchased any shares yet on their NCIB (despite paying much higher prices in their dutch auction tender). 

But I'm also skeptical about what Mittleman can accomplish here.  I think their SOTP has been surprisingly amateurish and they have made a number of mistakes and omissions in their intrinsic value calculations.  The lower cash balance (and still to be felt exit costs for much of the current bloated headcount and fixed costs) really limits their degrees of freedom if they want to build a growth platform from the ashes of the Aeroplan business.

I think the PLM Premier CEO dismissal is potentially bad news to the thesis as it signals a potential deterioration to this business (and its ultimate value). 

wabuffo

Wabuffo, would you mind clarifying what mistakes/omissions you believe Mittleman has made in their SOTP?

Best,
Movys
Title: Re: AIM.TO - Aimia
Post by: wabuffo on June 24, 2019, 09:34:42 AM
Wabuffo, would you mind clarifying what mistakes/omissions you believe Mittleman has made in their SOTP?

Movys - I thought Mittleman made several errors - some small, some big -- but, that in total, caused me to think they were always too optimistic in their SOTP.  Some examples:

1) they omitted the common dividend payable of $30m CAD (which was clearly spelled out in the notes to the financial statements) and generally ignored other liabilities that would have to be paid.  It's a nit - but every little bit is important in the SOTP balance sheet analysis.

2)they never provided an estimate of operating cash flow losses that would be incurred to get from point A to point B in whatever plan they were proposing.  This is always something you have to focus on in any restructuring or turnaround.  What will be the cash burn and for how long?   We can already see it since the Aeroplan sale.  AIMIA mgmt are burning $30-$40m CAD per year.  Mittleman was silent on this - but one could see $60m+ of operating cash burn before restructuring expenses.   

3) the most important error, in my opinion was Mittleman's estimate of the value of Aeroplan to Air Canada.  They kept using other situations where the entire business (including deferred revenue liability) was sold in its entirety.  But in Air Canada's case, they were looking at the situation as a make vs buy decision.  This is important because Air Canada would get a one-time cash inflow from building new deferred revenue liability (float) from scratch in a make-their-own Aeroplan scenario.  This one-time cash inflow needs to be reduced from the Aeroplan acquisition offer from Air Canada's perspective.  Sure there's risk to Air Canada trying to build Aeroplan v2.0 - but it's clear they had a viable alternative that generated cash as it started up and this amount (which was significant) needed to be netted out of Mittleman's Aeroplan value to Air Canada.  Especially, since no one else was going to buy it.  It was just a big item that made their SOTP flawed, IMO.

One has to take this sloppiness into account with any new business plans they come up with.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: movys on June 24, 2019, 10:11:42 AM
Thanks. 

The question of the value of Aeroplan to Air Canada is debatable I suppose, but it's now moot and Aimia's remaining assets are much easier to value. 

See Mittleman's Q4 2018 investor letter.  The $30m common dividend is included in the liabilities.  Your point about an estimate of cash flow losses while getting from point A to point B is fair, but note that Mittleman ascribed zero value to Aimia's substantial tax assets (650m in Canada; 150m in USA) as well as no control premium, so it's probably a wash, or close to it.

Any way you slice it, the true NAV is much higher than the current price and with a week to go until the standstill expires, I think this value will get unlocked one way or the other.
Title: Re: AIM.TO - Aimia
Post by: gokou3 on June 24, 2019, 10:14:59 AM
Does anyone know when is the AGM this year?  Previous years' happened in May.  Don't see an announcement yet, although the ballots are out..
Title: Re: AIM.TO - Aimia
Post by: wabuffo on June 24, 2019, 11:08:35 AM
See Mittleman's Q4 2018 investor letter.  The $30m common dividend is included in the liabilities. 

I know I'm picking a nit.  But it was nowhere to be seen in his letters of Aug 6 and Aug 21, 2018 -- despite its mention in the footnotes of the year-end 2017 annual report.
http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/AIM-CN-open-letter-to-BOD-08-06-18-FINAL.pdf (http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/AIM-CN-open-letter-to-BOD-08-06-18-FINAL.pdf)
http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/MB-PR-comments-on-Aeroplan-sale-08-21-18.pdf (http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/MB-PR-comments-on-Aeroplan-sale-08-21-18.pdf)
I was doing my own due dily around that time and was posting in the comments section of Seeking Alpha and here at COB&F  I hadn't seen any mention of it so I posted on Sept 6, 2018 in response to a Seeking Alpha article about AIMIA.
https://seekingalpha.com/article/4204305-impact-air-canadas-offer-aimias-shareholders#comment-79594807 (https://seekingalpha.com/article/4204305-impact-air-canadas-offer-aimias-shareholders#comment-79594807)
From then on, Mittleman started to add it as well.  Coincidence and/or sloppiness?

Regardless - I think the situation is a mess, there are still significant cash exit costs to be dealt with in trying to change strategy (or even execute the current strategy) and everyone is still overvaluing PLM.  But that's what makes a market.  Good luck - this situation no longer makes sense for me but it could still work out, though the degrees of freedom are shrinking rapidly.

wabuffo




Title: Re: AIM.TO - Aimia
Post by: movys on June 25, 2019, 09:56:04 AM
Does anyone know when is the AGM this year?  Previous years' happened in May.  Don't see an announcement yet, although the ballots are out..

June 28th, 10:30 AM EDT
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 02, 2019, 05:54:46 AM
See Mittleman's Q4 2018 investor letter.  The $30m common dividend is included in the liabilities. 

I know I'm picking a nit.  But it was nowhere to be seen in his letters of Aug 6 and Aug 21, 2018 -- despite its mention in the footnotes of the year-end 2017 annual report.
http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/AIM-CN-open-letter-to-BOD-08-06-18-FINAL.pdf (http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/AIM-CN-open-letter-to-BOD-08-06-18-FINAL.pdf)
http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/MB-PR-comments-on-Aeroplan-sale-08-21-18.pdf (http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/MB-PR-comments-on-Aeroplan-sale-08-21-18.pdf)
I was doing my own due dily around that time and was posting in the comments section of Seeking Alpha and here at COB&F  I hadn't seen any mention of it so I posted on Sept 6, 2018 in response to a Seeking Alpha article about AIMIA.
https://seekingalpha.com/article/4204305-impact-air-canadas-offer-aimias-shareholders#comment-79594807 (https://seekingalpha.com/article/4204305-impact-air-canadas-offer-aimias-shareholders#comment-79594807)
From then on, Mittleman started to add it as well.  Coincidence and/or sloppiness?

Regardless - I think the situation is a mess, there are still significant cash exit costs to be dealt with in trying to change strategy (or even execute the current strategy) and everyone is still overvaluing PLM.  But that's what makes a market.  Good luck - this situation no longer makes sense for me but it could still work out, though the degrees of freedom are shrinking rapidly.

wabuffo
What 'makes a market' has a lot to do with opinions about valuation.

The annual meeting voting results are out and, given typical institutional apathy and the largest shareholder's expired commitment, the situation is ripe for change and there is potential for market value convergence to intrinsic value.

The Cardlytics stake has done very well lately but a key part of the puzzle is the value of PLM's Club Premier. The CEO removal, the Q4 breakage adjustment, the unusual Q1 distribution and the new reported terminology about potential disagreements in joint ventures raise valid questions but a humble and long-term assessment of PLM suggests that it is really an equivalent to Aeroplan for Mexico: the leading coalition unit with a contract until 2030 and a 48.9% "joint control" stake, with an anchor most significant airline and very high free cash flow margins.

Aimia has made poor investments while issuing debt and preferred shares but I still contend that PLM was a very good investment. The first 28.9% interest cost them 35.1M USD in 2010 and 2011. In 2012, they were able to complete a pre-negotiated discounted addition of capital to raise their interest to 48.9%, with a cost of 89.1M USD (PLM enterprise valued at 518M then). Since then Aimia has received 119.1M USD in regular distributions and today's valuation of AIM's interest IMO (taking various inputs: multiple of gross billings, multiple of adjusted EBITDA, price per coalition members) has a relative floor at about 300M USD. Using these assumptions, the IRR since 2010 is about 20 to 21%. I would say it was a good deal especially given the disclosed fact in 2012 that the 89.1M USD capital used to increase their stake came from a debt issue maturing in 2018 with an interest rate of 4.35%. Since 2011, the number of members has doubled (now about 5,7M members), gross billings (CDN) has more than doubled (119.8M in 2011 to 328.8M in 2018 and projected about 350M in 2019). Since 2014, valuation of comparables (Smiles, Multiplus etc) has come down but frequent flyer programs continue to be very profitable and valuable for airlines.
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on July 08, 2019, 12:27:49 PM
https://finance.yahoo.com/news/aimia-shareholders-accountability-outraged-over-181300856.html

Call for a new meeting b/c of procedural irregularities with the one held last week.  Mittleman would be able to vote at this one, at with their votes the whole old board would be thrown out.

Get your popcorn
Title: Re: AIM.TO - Aimia
Post by: samwise on July 08, 2019, 08:09:10 PM
The tender was oversubscribed, and the rejected shares were sold down aggressively last week. I used the opportunity to buy some

Sold the extra shares today as the stock recovered from the selling pressure. Still have my original position.

Let’s see what the new fireworks produce.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 09, 2019, 05:02:47 AM
https://finance.yahoo.com/news/aimia-shareholders-accountability-outraged-over-181300856.html

Call for a new meeting b/c of procedural irregularities with the one held last week.  Mittleman would be able to vote at this one, at with their votes the whole old board would be thrown out.

Get your popcorn
One thing I find bizarre is the fact that the angry shareholder letter has been submitted by Aimia to Sedar, without some kind of rebuttal or comment.

Also, it seems that Aimia has not started its early June announced normal course issuer bid.
Title: Re: AIM.TO - Aimia
Post by: gokou3 on July 09, 2019, 08:13:16 PM
2.15M shares bought back in the past month... 6.75M to go.

https://ceo.ca/api/sedi?symbol=aim


https://web.tmxmoney.com/article.php?newsid=8666747940618180&qm_symbol=AIM
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on July 10, 2019, 06:19:52 AM
Mittleman not supporting existing directors - https://www.morningstar.com/news/pr-news-wire/PRNews_20190710NY08368/mittleman-brothers-llc-issues-statement-concerning-aimia-inc.html
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on July 12, 2019, 09:22:09 AM
“We have a lot of options on the table,” Mittleman said. “We’ve been approached by some high-quality director candidates that we think the market would find absolutely astounding.”

https://www.bnnbloomberg.ca/aimia-s-top-shareholder-touts-astounding-board-candidates-after-agm-fiasco-1.1286454
Title: Re: AIM.TO - Aimia
Post by: movys on July 15, 2019, 08:01:57 AM
See Mittleman's Q4 2018 investor letter.  The $30m common dividend is included in the liabilities. 

I know I'm picking a nit.  But it was nowhere to be seen in his letters of Aug 6 and Aug 21, 2018 -- despite its mention in the footnotes of the year-end 2017 annual report.
http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/AIM-CN-open-letter-to-BOD-08-06-18-FINAL.pdf (http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/AIM-CN-open-letter-to-BOD-08-06-18-FINAL.pdf)
http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/MB-PR-comments-on-Aeroplan-sale-08-21-18.pdf (http://www.mittlemanbrothers.com/wp-content/uploads/2018/08/MB-PR-comments-on-Aeroplan-sale-08-21-18.pdf)
I was doing my own due dily around that time and was posting in the comments section of Seeking Alpha and here at COB&F  I hadn't seen any mention of it so I posted on Sept 6, 2018 in response to a Seeking Alpha article about AIMIA.
https://seekingalpha.com/article/4204305-impact-air-canadas-offer-aimias-shareholders#comment-79594807 (https://seekingalpha.com/article/4204305-impact-air-canadas-offer-aimias-shareholders#comment-79594807)
From then on, Mittleman started to add it as well.  Coincidence and/or sloppiness?

Regardless - I think the situation is a mess, there are still significant cash exit costs to be dealt with in trying to change strategy (or even execute the current strategy) and everyone is still overvaluing PLM.  But that's what makes a market.  Good luck - this situation no longer makes sense for me but it could still work out, though the degrees of freedom are shrinking rapidly.

wabuffo
What 'makes a market' has a lot to do with opinions about valuation.

The annual meeting voting results are out and, given typical institutional apathy and the largest shareholder's expired commitment, the situation is ripe for change and there is potential for market value convergence to intrinsic value.

The Cardlytics stake has done very well lately but a key part of the puzzle is the value of PLM's Club Premier. The CEO removal, the Q4 breakage adjustment, the unusual Q1 distribution and the new reported terminology about potential disagreements in joint ventures raise valid questions but a humble and long-term assessment of PLM suggests that it is really an equivalent to Aeroplan for Mexico: the leading coalition unit with a contract until 2030 and a 48.9% "joint control" stake, with an anchor most significant airline and very high free cash flow margins.

Aimia has made poor investments while issuing debt and preferred shares but I still contend that PLM was a very good investment. The first 28.9% interest cost them 35.1M USD in 2010 and 2011. In 2012, they were able to complete a pre-negotiated discounted addition of capital to raise their interest to 48.9%, with a cost of 89.1M USD (PLM enterprise valued at 518M then). Since then Aimia has received 119.1M USD in regular distributions and today's valuation of AIM's interest IMO (taking various inputs: multiple of gross billings, multiple of adjusted EBITDA, price per coalition members) has a relative floor at about 300M USD. Using these assumptions, the IRR since 2010 is about 20 to 21%. I would say it was a good deal especially given the disclosed fact in 2012 that the 89.1M USD capital used to increase their stake came from a debt issue maturing in 2018 with an interest rate of 4.35%. Since 2011, the number of members has doubled (now about 5,7M members), gross billings (CDN) has more than doubled (119.8M in 2011 to 328.8M in 2018 and projected about 350M in 2019). Since 2014, valuation of comparables (Smiles, Multiplus etc) has come down but frequent flyer programs continue to be very profitable and valuable for airlines.

Cigarbutt et al.,

Now that Mittleman has publicly declared an intention to nominate a new slate of directors, what is the event path and timing from here?  Do the existing by-laws permit Mittleman to call a special meeting to vote on a new slate?  Do they have to wait until next year's annual meeting?  What recourse does Mittleman have to prevent a value-destructive transaction from going through before they can replace the current board.

Also curious for your thoughts on the board's decision to add two new members today.
Title: Re: AIM.TO - Aimia
Post by: Pref User on July 15, 2019, 11:50:45 AM
I believe the investor in Seattle said in their letter they need to have 5% of outstanding shares to call a special meeting. Which means Mittleman has more than enough to do so right now. It seems strange, especially after what Mittleman said on BNN, that Mittleman hasn't already called a special meeting. A new vote would be held and after looking at the results from the AGM the entire board except Mittleman would be removed.
Title: Re: AIM.TO - Aimia
Post by: gokou3 on July 15, 2019, 11:52:19 AM

Cigarbutt et al.,

Now that Mittleman has publicly declared an intention to nominate a new slate of directors, what is the event path and timing from here?  Do the existing by-laws permit Mittleman to call a special meeting to vote on a new slate?  Do they have to wait until next year's annual meeting?  What recourse does Mittleman have to prevent a value-destructive transaction from going through before they can replace the current board.

Also curious for your thoughts on the board's decision to add two new members today.

Are these two new members friends of the existing board, or of Mittleman?
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 15, 2019, 04:16:10 PM

Now that Mittleman has publicly declared an intention to nominate a new slate of directors, what is the event path and timing from here?  Do the existing by-laws permit Mittleman to call a special meeting to vote on a new slate?  Do they have to wait until next year's annual meeting?  What recourse does Mittleman have to prevent a value-destructive transaction from going through before they can replace the current board.

Also curious for your thoughts on the board's decision to add two new members today.
In Canada, a shareholder who controls 5% or more of common shares of a corporation can call for a special meeting. There are conditions and procedural steps in order to avoid personal and irrelevant grievances, querulousness and foul play but basically if an issue or several issues (specific business affairs) need to be addressed or have not been addressed appropriately, courts will side with the shareholder asking for the meeting. This appears to be an activist jurisprudential position but courts, even if they usually defer to the Board for business decisions, in this specific case, consider shareholders meetings to be a useful tool to discuss business issues. In Aimia's case, Mr. Mittleman then could call a meeting.

From the current management team's point of view, maybe thay are trying to preserve their jobs and benefits, maybe they are trying to shape a negotiating platform to improve results of a liquidation (I think they did that with some success when they were negotiating the sale of Aeroplan to Air Canada), maybe both. I don't know exactly what to make of the two new director additions but this is a bit of a bizarre move right after an annual meeting.

From the Mittleman investment management group's point of view, the posture is quite puzzling but they are probably aware of potential transactions and outcomes that are not out in the open and may underestimate the costs related to delaying the realization of residual intrinsic value. They may not have the right activist mindset?

Aeromexico is reporting Q2 results tomorrow.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 16, 2019, 06:55:50 AM
https://www.newswire.ca/news-releases/mittleman-brothers-llc-responds-to-33-3-increase-in-board-size-of-aimia-inc-only-17-days-after-agm-and-with-no-input-from-23-3-shareholder-821004576.html
Si vis pacem, para bellum.
Title: Re: AIM.TO - Aimia
Post by: movys on July 16, 2019, 07:44:00 AM
There are circumstances under which the board can legally refuse a >5% shareholder's request for a meeting.  These circumstances are laid out in the link below.  My read of the link suggests that the courts would "very likely" side with Mittleman, but it's not an obvious 100%.

https://www.dlapiper.com/en/canada/insights/publications/2017/05/shareholder-right-to-call-a-meeting/

On BNN Mittleman indicated they intend to nominate a new slate of directors "in a matter of weeks."  Does anyone think Aimia's board would fully litigate Mittleman's attempt to call a meeting?  Their decision to nominate two directors, in direct contradiction to their stated strategy of reducing the size of the board and without consulting Mittleman in the process, seems a clear sign they are hunkering in for open war with Mittleman.  If Aimia's board is prepared to fight to the death, they could do a lot of damage and waste a lot of time (and money) before a court finally ousts them.

Thoughts?
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 17, 2019, 03:37:09 AM
Wasn't Mittleman responsible for Rabe becoming CEO (and then locking up shares in support of Rabe)?  This is a serious question.  Why do we think Mittleman's people management and capital allocation skills are worth betting on, if he prevails.  I don't think its a sure thing - they haven't distinguished themselves so far.

wabuffo

Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 17, 2019, 04:25:13 AM
Wasn't Mittleman responsible for Rabe becoming CEO (and then locking up shares in support of Rabe)?  This is a serious question.  Why do we think Mittleman's people management and capital allocation skills are worth betting on, if he prevails.  I don't think its a sure thing - they haven't distinguished themselves so far.

wabuffo
Thank you for the valid and uncomfortable question.

I would say introducing Mr. Rabe into the equation was a good move because it looks like he was instrumental in building negotiating leverage with Air Canada (I think they got a better price for that) and, even if I did not feel that way, I remember you considered the transformation of Aeroplan without AC (and with Mr. Rabe) as a viable and valuable option.

But things have changed and there seems to be an entranchment issue now. After reviewing their long-term track record, I'm still OK with their investment 'style' and results. But do the Mittleman people have the necessary skillset for more active participation at this point? Can they team up with more pro-active partners? What's the point of having money in your pocket if there is a hole in it?
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 17, 2019, 04:48:27 AM
Quote
Thank you for the valid and uncomfortable question.

CB - I guess I'm looking for a reason to get back into this stock and trying to talk myself into it (after current NCIB expires and the price falls again). 

Quote
I would say introducing Mr. Rabe into the equation was a good move because it looks like he was instrumental in building negotiating leverage with Air Canada (I think they got a better price for that) and, even if I did not feel that way, I remember you considered the transformation of Aeroplan without AC (and with Mr. Rabe) as a viable and valuable option.

I'm not sure Rabe struck a better deal (if you believe the filings in the employee wrongful dismissal lawsuit filed by the ex-VP strategy).  It sounded like Rabe was ready to accept the initial, lower AC offer.  Like you, I assumed Mittleman Bros had done their homework on Rabe and thoroughly aligned on his personal objectives as CEO pre- and post-Aeroplan sale.  If I had a large position in AIMIA, I would've made my share lock-up conditional on very explicit and measureable goals.  This looked like naiveté or laziness - or both and shocked me.

I really thought AIMIA should've fought much harder but I don't think they understood their strengths.  They really had huge leverage over the banks in particular (and didn't use it).  Look at how much money TD, CIBC paid to AC to retain their credit card franchises with Aeroplan.  I always thought TD and CIBC had the most to lose in a burn-down scenario as they had invested a lot of money in their Aeroplan credit cards being "front-of-wallet" with their consumers.  AC basically was paid to take Aeroplan on by the banks (if you ignored the deferred revenue liabilities assumed - and probably still at a positive NPV if you value the deferred liabilities at the marginal direct cash cost to AC for redeeming them).

I think the major risk is that AIMIA is still a high-cost, marketing culture that is likely to make an expensive, debt-fueled acquisition (potentially with common share issuance) despite Mittleman's objections.  In fact, Mittleman's recent activism of the last few weeks may force them to rush their diworsification attempts.

But we'll see - I think there's a chance that your faith in Mittleman's skills may very well be rewarded and I will regret sitting this out after the dutch auction tender.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: movys on July 17, 2019, 06:18:33 AM
Disclosure from Aeromexico in their release yesterday.  Hard to say what their intentions are.  What does a "seamless transition away from PLM Premier as soon as possible mean?"  Do they want to sell it? 

Grupo Aeroméxico discloses that, following the recent removal of the Chief Executive Officer of its
51.145% partially-owned subsidiary PLM Premier, S.A.P.I. de C.V. (“PLM Premier”), Grupo
Aeroméxico has written to Aimia Inc. (“Aimia”), the holder of the other 48.855% of PLM Premier,
and placed Aimia on notice regarding what Grupo Aeroméxico believes have been irregularities and
potential breaches of the relevant contractual arrangements governing PLM Premier. Grupo
Aeroméxico has advised Aimia that Grupo Aeroméxico will take all actions reasonably required to
protect its interests and those of its customers including a full evaluation of all possible legal
remedies available to Grupo Aeroméxico. Grupo Aeroméxico has also advised Aimia that, given
recent events, Grupo Aeroméxico is re-evaluating all aspects of its customer loyalty strategy with a
view, wherever possible in compliance with the relevant contractual arrangements, to minimizing
reliance on PLM Premier going forward and ensuring a seamless transition away from PLM Premier
as soon as possible in accordance with the legal rights and obligations of Grupo Aeroméxico and
Aerovías de México, S.A. de C.V. Grupo Aeroméxico is ensuring that its customers will continue to
receive outstanding services and loyalty rewards.
Title: Re: AIM.TO - Aimia
Post by: Sunrider on July 17, 2019, 07:01:18 AM
Disclosure from Aeromexico in their release yesterday.  Hard to say what their intentions are.  What does a "seamless transition away from PLM Premier as soon as possible mean?"  Do they want to sell it? 

Grupo Aeroméxico discloses that, following the recent removal of the Chief Executive Officer of its
51.145% partially-owned subsidiary PLM Premier, S.A.P.I. de C.V. (“PLM Premier”), Grupo
Aeroméxico has written to Aimia Inc. (“Aimia”), the holder of the other 48.855% of PLM Premier,
and placed Aimia on notice regarding what Grupo Aeroméxico believes have been irregularities and
potential breaches of the relevant contractual arrangements governing PLM Premier. Grupo
Aeroméxico has advised Aimia that Grupo Aeroméxico will take all actions reasonably required to
protect its interests and those of its customers including a full evaluation of all possible legal
remedies available to Grupo Aeroméxico. Grupo Aeroméxico has also advised Aimia that, given
recent events, Grupo Aeroméxico is re-evaluating all aspects of its customer loyalty strategy with a
view, wherever possible in compliance with the relevant contractual arrangements, to minimizing
reliance on PLM Premier going forward and ensuring a seamless transition away from PLM Premier
as soon as possible in accordance with the legal rights and obligations of Grupo Aeroméxico and
Aerovías de México, S.A. de C.V. Grupo Aeroméxico is ensuring that its customers will continue to
receive outstanding services and loyalty rewards.

Looks like they want to get rid of Aimia. Don't know what the agreements say in terms of when they can do that, but I would think it's likely the opening move in a strategy designed to get AIMIA to sell them their stake at a price Aeromex think is attractive. After the bumbling idiots' showed how smart they are in dealing with carriers, I would not be surprised to see them try to get the loyalty programme not the cheap.
Title: Re: AIM.TO - Aimia
Post by: movys on July 17, 2019, 07:17:56 AM
Could be, and the market doesn't seem perturbed by this development, but could it not be something more ominous? 

Aeromexico abruptly fires PLM's CEO with no explanation, notifies Aimia of "irregularities" with regard to potential breaches in the contractual the governance of PLM (presumably on the part of Aimia), and now says they want to completely change their customer loyalty program and minimize reliance on PLM as quickly as possible.

They recently made a public bid for Aimia's share of PLM, so they clearly want the asset, but strong-arming Aimia into a sale of Aimia's stake to Aeromexico by claiming they don't want to rely on PLM anymore all couched in vaguely threatening legalese seems an odd way to go about it.

Maybe I'm overthinking this.  Perhaps Aeromexico will address in more detail on the call later this morning.  Has anyone gotten through to Karen or anyone else at Aimia on this issue?
Title: Re: AIM.TO - Aimia
Post by: Pref User on July 17, 2019, 07:30:03 AM
I agree that this is a move to force Aimia to sell sooner. It is interesting now after the rejection of the first deal Aeromexico offer that Aimia has somehow breached the contract in less than a year. This could be there move to counter and remove PLM and instead of waiting until 2030, which I am guessing is because there is a noncompete clause with PLM. Aeromexico risks waiting until 2030 launching their own loyalty program when all the other Mexican airlines could be much more improved and have other offerings in the market.

It's also funny that these comments came out after everything that has happened in the last two weeks. The last time they made an offer was when the offer came in from Air Canada when they smelt blood in the water. This could be a move to scare the shit out of the current management to sell now and keep shareholders happy, saying that "hey guys we got you this value when it could have been much worse". 

I think I am starting to understand why Mittleman is keeping it so silent now, they see the game Aeromexico is playing. If they start talking this could change the situation, I am guessing they aren't going to say anything until a board change happens. Then we should see with less infighting at Aimia what Aeromexico's tone is.

The other thought I have is it means that Aeromexico is now willing to start from scratch to build up their own loyalty program. Which will require new credit card contracts, marketing, and acceptance from new members. This would be a 3-5 year plan for Aeromexico to complete.

It also means that Aeromexico will be a forced seller of their stake in the business, which one of the other airlines could try and scoop up and help that airline avoid starting their own loyalty program. From my research, there are 5 decent sized airlines in Mexico, with Aeromexico being the largest. Only 1 of the other 4 has a loyal program, which could make a switch reasonably possible. 
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 17, 2019, 07:42:23 AM
Aeromexico appears to be following AC's 'playbook' - threaten to walk away from PLM and 'build their own' loyalty program and hold the banks' credit card franchises hostage.

I don't think this is a good development for AIMIA.  Remember shareholders didn't even find out from the Company about the PLM CEO termination.  This was after a huge charge taken in Q4 that significantly increased deferred revenue liabilities due to an improper accounting of breakage.  Throw in arm-twisting from AIM's mgmt for a large one-time dividend and perhaps there are real problems at PLM and it isn't the crown jewel everyone thinks it is. 

The AIM mgmt team has proven time and again that they just don't know how to handle these negotiations (Air Canada, Sainsbury Nektar, etc)...  You have to take a John Malone scorched-earth approach to negotiations or else you will be preyed upon as a patsy.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: movys on July 17, 2019, 07:45:25 AM
I agree that this is a move to force Aimia to sell sooner. It is interesting now after the rejection of the first deal Aeromexico offer that Aimia has somehow breached the contract in less than a year. This could be there move to counter and remove PLM and instead of waiting until 2030, which I am guessing is because there is a noncompete clause with PLM. Aeromexico risks waiting until 2030 launching their own loyalty program when all the other Mexican airlines could be much more improved and have other offerings in the market.

It's also funny that these comments came out after everything that has happened in the last two weeks. The last time they made an offer was when the offer came in from Air Canada when they smelt blood in the water. This could be a move to scare the shit out of the current management to sell now and keep shareholders happy, saying that "hey guys we got you this value when it could have been much worse". 

I think I am starting to understand why Mittleman is keeping it so silent now, they see the game Aeromexico is playing. If they start talking this could change the situation, I am guessing they aren't going to say anything until a board change happens. Then we should see with less infighting at Aimia what Aeromexico's tone is.

The other thought I have is it means that Aeromexico is now willing to start from scratch to build up their own loyalty program. Which will require new credit card contracts, marketing, and acceptance from new members. This would be a 3-5 year plan for Aeromexico to complete.

It also means that Aeromexico will be a forced seller of their stake in the business, which one of the other airlines could try and scoop up and help that airline avoid starting their own loyalty program. From my research, there are 5 decent sized airlines in Mexico, with Aeromexico being the largest. Only 1 of the other 4 has a loyal program, which could make a switch reasonably possible. 

thanks for the thoughtful comment.  the group of restless shareholders continues to grow and it seems there's a lot happening behind the scenes with mittleman and the others.  mittleman should announce its slate in the coming weeks and the event path will then crystallize.  regardless of whether Aeromexico wishes to force Aimia to sell or force a sale to a 3rd-party, either scenario should unlock significant value for Aimia shareholders.
Title: Re: AIM.TO - Aimia
Post by: Pref User on July 17, 2019, 07:48:32 AM
Sainsbury I'll give them the benefit of the doubt. For that one, I think RBC forced them into the sale. RBC had a loan to Aimia that was due after the 2019 bonds that they most likely would have lost money on. With the sale on sainsbury it released cash reserves that were used to pay back half of RBC's loan, and then a cash flow sweep was put in place to start paying off the rest of the loan. By the time AC made its offer for Aeroplan 75% of RBC's loan had been paid off. RBC essentially jumped the capital structure. Remember the Banks always win in Canada
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 17, 2019, 07:55:24 AM
Quote
Sainsbury I'll give them the benefit of the doubt.

I think you are being too lenient.  It was a total FUBAR. 

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 17, 2019, 08:59:01 AM
The commercial partners (Sainsbury, Air Canada and Aeromexico) have done and will do their best to maximize their own outcomes.

For the Nectar program, there was no anchor airline partner, Sainsbury was the main commercial partner, the program had relatively poor margins, was not gaining traction and the contract had come to expiration.

For Aeroplan, the contract was coming to expiration within months and AC got aggressive. In retrospect, how far do you think AC went (and spent) on creating their own loyalty program and how likely was it that they simply wanted to get the assets for the best price possible. Things got pretty nasty then but I think Aimia got a fair deal (although low-ball, especially given what the credit card issuers 'invested' after along AC).

For PLM, nasty developments are perhaps coming but the structure and expiration (2030) of the partnership (joint venture) is different. I don't see how the Q4 breakage adjustment can be considered improper (with present disclosures). Aimia too had to significantly lower the breakage assumption for the Aeroplan program a few years ago and this can be considered a sign of customer engagement and the accounting adjustment was tied with credit card issuer 'contributions' as the issuers (who collect merchant fees) wanted to participate in the growth also. The way the story evolves for PLM is another argument for AIM liquidation. They should enter negotiations (obtain independent appraisals) and agree on a satisfactory price taking account the expiration date of the contractual agreement, the partnership structure, the profitability and growth inputs as well as the noise that Aeromexico is making.

Financial partners continue to see tremendous value in loyalty and frequent flyer programs. Have you seen the latest cashflow projections from the Delta-American Express deal? American Express is ready to provide the airline with cash payments resulting in huge margins (vs cost of rewards), whatever the ultimate breakage estimate is recorded at. Delta and Aeromexico have significant financial and operational ties. Club Premier is connected to major financial partners and they have captured the growing segment of the population who are high relative spenders.

I think there is still a margin of safety on the financial side but there is an underlying assumption that key actors will act reasonably well, which is always a risky assumption (margin of safety about human nature).
Title: Re: AIM.TO - Aimia
Post by: movys on July 17, 2019, 10:13:07 AM
Comparisons of Aeromexico's actions to those of Air Canada are misplaced.  The long-dated nature of the contract leaves Aimia in a much stronger negotiating position than was the case with Aeroplan or Nectar.  Any claim by Aeromexico of wanting to launch their own loyalty program is far less credible than a similar claim made by Air Canada (Aeromexico literally just tried to buy the 49% of PLM they don't own!).

PLM is a growing asset in an under-penetrated market and Aeromexico has no real leverage over Aimia here.  In an absurdly draconian case, you could assume that PLM disappears in 2030, and the pv of the cash flows Aimia will receive until then are over $350m (assumes LDD Ebitda growth for next couple years and then MSD growth after that).

The reality, of course, is that the terminal value in 2030 is NOT zero, but the point is you still make money even if it were.

I agree that hostilities between Aeromexico/Aimia only strengthen the argument for divestiture of the asset, either to each other or a third party.  A spin onto the Mexican exchange would also do the trick.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 17, 2019, 10:45:07 AM
Quote
PLM is a growing asset in an under-penetrated market and Aeromexico has no real leverage over Aimia here.  In an absurdly draconian case, you could assume that PLM disappears in 2030, and the pv of the cash flows Aimia will receive until then are over $350m (assumes LDD Ebitda growth for next couple years and then MSD growth after that).

Let me ask you - did you think AIMIA received fair value for their Aeroplan asset?  Mittleman had values of $1B+ for Aeroplan in his SOTP.  What did AIMIA actually receive? $450m (I'm excluding w/c adjustments which are just dollar-for-dollar liquidations of an asset for cash).   

What does Mittleman think AIMIA's stake in PLM is worth in his SOTP -- $489m USD ($1B USD total)?  What will AIMIA/Mittleman actually get in a hostile, bare-knuckled negotiation based on their track record?  I'd say $220m USD based on their historical track record.  AIMIA relies on the distributions from PLM to cover part of their operating cash shortfalls.  What if that is shut off by Aeromexico/PLM during negotiations?  Who will have more leverage?  And all of this $1B USD fair value is before potential issues at PLM (of which we can't be certain about their materiality to the business's intrinsic value).

At $220m USD of net proceeds for 48.9% of PLM, there is barely $4 CAD per share of net liquidation value per common share after taking into account operating cash losses and exit/liquidation costs.

The history of AIMIA has been overly-optimistic forecasts by Mittleman et al and very poor actual execution in receiving fair value for these 'wonderful' assets.

But of course, I could be (and often am) wrong about this situation.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: movys on July 17, 2019, 05:34:13 PM
Quote
PLM is a growing asset in an under-penetrated market and Aeromexico has no real leverage over Aimia here.  In an absurdly draconian case, you could assume that PLM disappears in 2030, and the pv of the cash flows Aimia will receive until then are over $350m (assumes LDD Ebitda growth for next couple years and then MSD growth after that).

Let me ask you - did you think AIMIA received fair value for their Aeroplan asset?  Mittleman had values of $1B+ for Aeroplan in his SOTP.  What did AIMIA actually receive? $450m (I'm excluding w/c adjustments which are just dollar-for-dollar liquidations of an asset for cash).   

What does Mittleman think AIMIA's stake in PLM is worth in his SOTP -- $489m USD ($1B USD total)?  What will AIMIA/Mittleman actually get in a hostile, bare-knuckled negotiation based on their track record?  I'd say $220m USD based on their historical track record.  AIMIA relies on the distributions from PLM to cover part of their operating cash shortfalls.  What if that is shut off by Aeromexico/PLM during negotiations?  Who will have more leverage?  And all of this $1B USD fair value is before potential issues at PLM (of which we can't be certain about their materiality to the business's intrinsic value).

At $220m USD of net proceeds for 48.9% of PLM, there is barely $4 CAD per share of net liquidation value per common share after taking into account operating cash losses and exit/liquidation costs.

The history of AIMIA has been overly-optimistic forecasts by Mittleman et al and very poor actual execution in receiving fair value for these 'wonderful' assets.

But of course, I could be (and often am) wrong about this situation.

wabuffo

Your points about historical value-destructive behavior are valid, but it's illogical to make a prediction about the outcome of a negotiation when an entity is in a position of strength based on previous negotiations when that entity was in a position of extreme weakness.  Think back to the Aeroplan negotiations.  Air Canada's threat to go it alone was more credible, Aimia was on the clock, and there were confusing issues around how to treat the liabilities within Aeroplan.

Aimia is a much cleaner company today and is under no time pressure as it relates to PLM.  If Mittleman runs a slate and refreshes the current board, who would presumably move quickly to wind down ILS and any other loss-making operating assets, any sense of urgency totally evaporates and Aimia's negotiating position re PLM strengthens further.

And while there's certainly no love lost between Aimia/Aeromexico, virtually every negotiation in the real world is "hostile and bare-knuckled."  I think the biggest near-term risk is a massive operational slow-down at PLM, but there are currently no signs of that.  I don't know what PLM is worth, but what would you pay for a rapidly growing, high-ROIC business with negative working capital and massive tax advantages that continues to dividend its excess "float" and income to you?  If PLM were a standalone public company I think it would fetch well north of 10x.

Your estimate of $220m for Aimia's stake in PLM is ~5.5x EBITDA and is comically low for a business of that quality.  But as you point out, if somehow everything goes wrong for Aimia...if Mittleman can't refresh the board despite broad shareholder support for this, if the incumbent board gives PLM away at 5.5x in a bewildering display of insanity...you're still left with a liquidation value of something above the current share price.  So it's basically heads I win, tails I don't lose, and the probability of landing on tails is more like 10%, as opposed to 50%.  We have the ultimate margin of safety here and I can understand why Mittleman has decided to make this relatively illiquid investment its largest holding.

movys
Title: Re: AIM.TO - Aimia
Post by: movys on July 17, 2019, 05:46:24 PM
and don't forget about the $650m in NOLs.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 17, 2019, 08:05:44 PM
^
1-As far as 'issues' at PLM, anything is possible but Aimia published today a standard rebuttal which strengthens the noise thesis. I wonder if this not about a relatively minor questioning about consulting services that an Aimia sub charged separately, which amounted to about 6M per year and for which disclosure seems to have changed in 2018.
2-The higher expected valuation by Mr. Mittleman was related to the fact that redemption liabilities were discounted to essentially zero. Opinions varied on the extent of the discount but it was an unrealistic assumption. This factor is much less of an issue with PLM because the deferred revenue to gross billings or adjusted EBITDA is much lower (even after the 106.4M addition because of the changed breakage assumption), given the fact that growth, if it continues, will be associated with growing cashflows matched by a growing liability with a float component and high margins when deferred revenue will eventually recognized. Earlier in these pages, wabuffo had explained how this was a potential advantage for a nascent in-house Air Canada program vs the mature redemption liability laden Aeroplan.
3-Again comparing previous transactions and comparing the degree of negotiating leverage, I agree that Aimia is not in the driver's seat (as the short-serving Scandinavian CFO had alluded to in a conference call). But it appears that the PLM scenario is the most favorable. At 220M USD, the price tag would correspond (slightly lower) to the value attributed to PLM in 2012 (independent valuation) when members were half of now and gross billings less than half of now. I think 220M is too low but upside may be limited given a souring relationship.
Title: Re: AIM.TO - Aimia
Post by: Pref User on July 18, 2019, 07:34:46 AM
and don't forget about the $650m in NOLs.

For this, the company said $400 M of Canadian capital loss from selling Aeroplan. From talking to tax people this is not an NOL, it cannot be used against operating income. They could use the $400 M to help shield any capital gains taxes that would be realized from any of the sales of assets be it PLM, BIG or Cardlytics.

This means you cannot include this $400 M in a valuation. For example, they sell PLM, the capital loss is used to shield the capital gain. If you include the capital loss you've double-counted the value. Or you need to reduce your PLM value for after tax and then you can include the Capital losses value in your valuation.

Also since it is a capital loss if Mittleman tried to take over Aimia the capital loss would be canceled/lost in the transaction under Canadian tax law, which would be value destructive.
Title: Re: AIM.TO - Aimia
Post by: movys on July 18, 2019, 09:25:12 AM
and don't forget about the $650m in NOLs.

For this, the company said $400 M of Canadian capital loss from selling Aeroplan. From talking to tax people this is not an NOL, it cannot be used against operating income. They could use the $400 M to help shield any capital gains taxes that would be realized from any of the sales of assets be it PLM, BIG or Cardlytics.

This means you cannot include this $400 M in a valuation. For example, they sell PLM, the capital loss is used to shield the capital gain. If you include the capital loss you've double-counted the value. Or you need to reduce your PLM value for after tax and then you can include the Capital losses value in your valuation.

Also since it is a capital loss if Mittleman tried to take over Aimia the capital loss would be canceled/lost in the transaction under Canadian tax law, which would be value destructive.

Understood, but there is also ~$250m in non-Canada NOLs.  The other angle is that the value of the NOLs could be realized by acquiring a business with operating losses.  In other words, it's additional optionality you are currently getting for free.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 19, 2019, 06:27:02 AM
There are important distinctions between Aeroplan and PLM in favor of Aimia.
There are two levels of analysis. First, Aimia lately has received, per year, about 6 to 7M of revenue (consulting services) from PLM and this revenue historically has accrued to a US sub from PLM operating expenses. Until proven otherwise, this contractual arrangement is good until 2030. Second, the 48.9% ownership is permanent.

Why would Aeromexico jettison an entity that was valued at 518M USD in 2012, that was rumored to be valued around 1B later when an IPO was discussed?

With the Air Canada playbook, the contract was close to renewal and AC had 0% ownership of the loyalty entity. Apart from potential reputational damage and a wave of disgruntled passengers during the transition, AC had every reason to directly and indirectly threaten the asset and liability values of the loyalty entity. By raising the possibility of starting its own loyalty program, Aeroplan intangible assets were on their way to lose significant value while raising the possibility of shortening the time for redemption ('run on the bank') for deferred revenue on Aimia's books.

For PLM, Aeromexico owns 51.1% of the assets and liabilities. The present value of PLM includes the expected distributions as well as the terminal value expected in 2030, whether the Aimia consulting service agreement is renewed or not. Anything is possible, but, since 2011, all reported numbers at PLM suggest that it's been growing successfully, has kept high margins, has teamed up with the major and relevant credit card issuers and financial partners and has captured the premium credit card market (holders of credit cards who spend ++ and whose commercial transactions drive cashflows for the airline).

Why would Aeromexico shoot itself in the foot while trying to run away from Aimia?

Aeromexico is in the driver's seat but, if they want 100% of PLM now, I would say they will have to pay close to fair value. Fair value is in a range that is lower than when the IPO idea was floated (perhaps by 20 to 30% IMO) but PLM has continued to grow profitably since then. Both parties could always get independent valuations. I would be happy to obtain a good price for the investment but would also be fine if it would be held forever.

Note: The consulting service revenue has been paid by PLM to an Aimia US subsidiary and this disclosure can be found (except for 2018) in the latter parts of the financial notes when transactions with related entities are listed.
Revenues per year in CDN
2011: 2.2   2012: 1.7   2013: 5.2   2014: 5.4   2015: 6.7   2016: 6.5   2017: 6.5   2018:?
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 19, 2019, 06:37:30 AM
Quote
Note: The consulting service revenue has been paid by PLM to an Aimia US subsidiary and this disclosure can be found (except for 2018) in the latter parts of the financial notes when transactions with related entities are listed.
Revenues per year in CDN
2011: 2.2   2012: 1.7   2013: 5.2   2014: 5.4   2015: 6.7   2016: 6.5   2017: 6.5   2018:?

CB - thanks for this!  I somehow missed this disclosure. 

I know I am currently agnostic on AIMIA, but isn't PLM an important source of cash right now for AIM (when they are bleeding cash everywhere else - including the resumption of preferred divs.)   You say that AIM has a stronger negotiating position vis-a-vis Aeromexico (vs Air Canada), but I would argue that Aeromexico can shut down dividends and consulting revenue (if its still occuring).  This actually places AIM in a weaker position because at least with AC they still had the operating cash flows from Aeroplan.

It could also be that Aeromexico is also trying to reset its contracts with its banking partners (AMEX, Santander) by threatening to dissolve PLM and start anew (though I agree that its hard to envision them walking away from their investment).  Witness what the Canadian banks paid AC to retain their Aeroplan relationships.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 19, 2019, 07:37:15 AM
Quote
First, Aimia lately has received, per year, about 6 to 7M of revenue (consulting services) from PLM and this revenue historically has accrued to a US sub from PLM operating expenses. Until proven otherwise, this contractual arrangement is good until 2030.

I think this consulting agreement was with AIMIA's US CEL division which was sold in mid-2017.  There was no revenue disclosure in 2018 because this biz is gone.

wabuffo

Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 19, 2019, 07:47:18 AM
Quote
Note: The consulting service revenue has been paid by PLM to an Aimia US subsidiary and this disclosure can be found (except for 2018) in the latter parts of the financial notes when transactions with related entities are listed.
Revenues per year in CDN
2011: 2.2   2012: 1.7   2013: 5.2   2014: 5.4   2015: 6.7   2016: 6.5   2017: 6.5   2018:?

CB - thanks for this!  I somehow missed this disclosure. 

1-
I know I am currently agnostic on AIMIA, but isn't PLM an important source of cash right now for AIM (when they are bleeding cash everywhere else - including the resumption of preferred divs.)   You say that AIM has a stronger negotiating position vis-a-vis Aeromexico (vs Air Canada), but I would argue that Aeromexico can shut down dividends and consulting revenue (if its still occuring).  This actually places AIM in a weaker position because at least with AC they still had the operating cash flows from Aeroplan.

2-
It could also be that Aeromexico is also trying to reset its contracts with its banking partners (AMEX, Santander) by threatening to dissolve PLM and start anew (though I agree that its hard to envision them walking away from their investment).  Witness what the Canadian banks paid AC to retain their Aeroplan relationships.

wabuffo
On 1-, this is one of the reasons Aeromexico can push the envelope to the extent they do and the threat is real.
On 2-, airlines, like many others, tend to follow the institutional imperative and they likely look at each other and see how credit card partners are ready to cough up huge amounts. I hope this dynamic plays out and wonder if Aimia can force more transparency there.

US CEL is gone but there was still likely a material amount of revenue recognized somewhere within Aimia from PLM.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 19, 2019, 07:51:14 AM
US CEL is gone but there was still likely a material amount of revenue recognized somewhere within Aimia from PLM.
 
CB - say more...   Do you think Aimia tried to double-dip in 2018 after selling the US CEL biz to CM Insights in 2017?

wabuffo
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 19, 2019, 08:03:33 AM
see how credit card partners are ready to cough up huge amounts.

This is what originally got me excited about AIMIA's negotiating position vs Air Canada and why I was posting about that here in 2018.  Rabe left a lot of money on the table if you look at it as a three-way negotiation (including TD, CIBC, AMEX) vs a two-way (AIM vs AC).

Look at AC's disclosures in their Q1 cash flow statement after the transaction closed (pay attention to the cash flow statement).
https://www.aircanada.com/content/dam/aircanada/portal/documents/PDF/en/quarterly-result/2019/2019_FSN_q1.pdf (https://www.aircanada.com/content/dam/aircanada/portal/documents/PDF/en/quarterly-result/2019/2019_FSN_q1.pdf)

Card Agreements.............................$1212
Aeroplan Miles prepayment proceeds...$ 400
Acquisition of Aeroplan............... .....($ 497)

In effect the banks paid AC to acquire the business by offsetting much of the assumed redemption liability and validating the total value of Aeroplan to the bank's credit card profitability.  If you assume that AC's marginal cash cost of providing seats as rewards is a lot lower than AIMIA's cost to purchase those same seats from AC, AC was paid to take on a profitable business with ongoing positive cash flows beyond the initial acquisition.  The NPV to AC was huge.  AIMIA was unfortunately the patsy at the poker table with the banks and AC.  Rabe should've extracted part of the banks' payment to maintain their Aeroplan association vs letting it all go to AC.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 19, 2019, 09:13:17 AM
^I am not suggesting or saying anything specific about consulting services revenue disclosure and there a few possibilities. Maybe, it was felt to be non-material in 2018 or was merged, from the accounting point of view, in the corporate reshuffling. Historically, I assumed that those consulting revenues (which were likely quite profitable) were allocated to unprofitable US segments (there seemed to be ample room there and it wasn't always the US CEL segment), for tax reasons.

For the hidden or unrecognized value from credit card partners, it looks like Aeromexico learned from the AC maneuver. So, hope is warranted that present Aimia or those in the corridors of power have had their lessons too. And yes "The NPV to AC was huge".
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 19, 2019, 03:03:16 PM
First, Aimia lately has received, per year, about 6 to 7M of revenue (consulting services) from PLM and this revenue historically has accrued to a US sub from PLM operating expenses. Until proven otherwise, this contractual arrangement is good until 2030. Second, the 48.9% ownership is permanent.

Again - I don't think this is quite right.  The US sub was sold (US CEL) and it is unknown as to whether AIMIA continues to receive any consulting revenue from PLM (the lack of related-party disclosure in 2018 to that effect seems to indicate that it currently does not).

Second the contractual agreement that runs til 2030 is between Aeromexico (the airline) and PLM (the loyalty program) and not with any US sub providing consulting services to PLM.   While its true that AIMIA's 48.9% ownership of PLM is permanent - after 2030 (or sooner - see next paragraph), it could be 48.9% of an orphaned loyalty program with no Aeromexico as sponsor.

It appears to me that Aeromexico is announcing that they will sue to terminate this contractual agreement with PLM ASAP due to breach of contract.  The fact that the PLM CEO was dismissed points to some potential smoking gun.  Perhaps the PLM CEO was too close to Rabe and Aeromexico is furious about the huge one-time dividend ($20m CAD) from PLM to AIMIA in Q1.  The firing seems to overlap with the change in approach by AIMIA in terms of being more "hands-on" with PLM after the Aeroplan sale.  I am quite a bit concerned that AIMIA's mgmt never disclosed the PLM CEO firing as it seems a material event and we had to hear about it from Mittleman and later Aeromexico.  It adds to the suspicion about AIMIA's behavior and incentives regarding more aggressive management of PLM results that is consistent with other behavior clues in the way they conducted the AGM/new BOD member announcement.

Whether this is a negotiating ploy by Aeromexico or not doesn't matter.  It is a declaration of war against AIMIA - a war AIMIA can ill afford right now if it loses access to the PLM dividend income while it has a bloated cost structure and is bleeding cash everywhere else.  During the Q4 2018 conference call, AIMIA made a big deal of the fact that could/would wring out more cash dividends from PLM and used those projections to massage their lack of operating cash generation.   They now face a money-losing ILS business, expensive overhead, preferred dividend commitments as well as sending cash out the door via buybacks with the prospect of potential legal expenses and a multi-year fight with Aeromexico.

Their track record in these stand-offs is not a cause for optimistic valuation scenarios.  The fact that AIMIA management didn't husband their cash after the Aeroplan sale (ie, keep the preferreds stranded, not distribute cash to shareholders via tender/NCIB, and drastically cut operations down to the bone to preserve cash) means that they have less degrees of freedom right now from which to negotiate.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 22, 2019, 07:48:02 AM
First, Aimia lately has received, per year, about 6 to 7M of revenue (consulting services) from PLM and this revenue historically has accrued to a US sub from PLM operating expenses. Until proven otherwise, this contractual arrangement is good until 2030. Second, the 48.9% ownership is permanent.

Again - I don't think this is quite right.  The US sub was sold (US CEL) and it is unknown as to whether AIMIA continues to receive any consulting revenue from PLM (the lack of related-party disclosure in 2018 to that effect seems to indicate that it currently does not).

Second the contractual agreement that runs til 2030 is between Aeromexico (the airline) and PLM (the loyalty program) and not with any US sub providing consulting services to PLM.   While its true that AIMIA's 48.9% ownership of PLM is permanent - after 2030 (or sooner - see next paragraph), it could be 48.9% of an orphaned loyalty program with no Aeromexico as sponsor.

It appears to me that Aeromexico is announcing that they will sue to terminate this contractual agreement with PLM ASAP due to breach of contract.  The fact that the PLM CEO was dismissed points to some potential smoking gun.  Perhaps the PLM CEO was too close to Rabe and Aeromexico is furious about the huge one-time dividend ($20m CAD) from PLM to AIMIA in Q1.  The firing seems to overlap with the change in approach by AIMIA in terms of being more "hands-on" with PLM after the Aeroplan sale.  I am quite a bit concerned that AIMIA's mgmt never disclosed the PLM CEO firing as it seems a material event and we had to hear about it from Mittleman and later Aeromexico.  It adds to the suspicion about AIMIA's behavior and incentives regarding more aggressive management of PLM results that is consistent with other behavior clues in the way they conducted the AGM/new BOD member announcement.

Whether this is a negotiating ploy by Aeromexico or not doesn't matter.  It is a declaration of war against AIMIA - a war AIMIA can ill afford right now if it loses access to the PLM dividend income while it has a bloated cost structure and is bleeding cash everywhere else.  During the Q4 2018 conference call, AIMIA made a big deal of the fact that could/would wring out more cash dividends from PLM and used those projections to massage their lack of operating cash generation.   They now face a money-losing ILS business, expensive overhead, preferred dividend commitments as well as sending cash out the door via buybacks with the prospect of potential legal expenses and a multi-year fight with Aeromexico.

Their track record in these stand-offs is not a cause for optimistic valuation scenarios.  The fact that AIMIA management didn't husband their cash after the Aeroplan sale (ie, keep the preferreds stranded, not distribute cash to shareholders via tender/NCIB, and drastically cut operations down to the bone to preserve cash) means that they have less degrees of freedom right now from which to negotiate.

wabuffo
You state the bear case really well for the PLM piece of the puzzle (large and essential piece).
There is an interesting catalyst coming from the Aimia website this morning.
I now stand with the Mittleman team (opportunistic point of view) and if one is here from a valuation standpoint, I guess the Board is saying to quit beating around the bush.
https://corp.aimia.com/news/

Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 22, 2019, 08:05:23 AM
There is an interesting catalyst coming from the Aimia website this morning.

I think this is strictly a legal maneouvre to prevent Mittleman from calling for an AGM in order to replace the BOD.  If they can find a friendly judge to rule that Mittleman breached the standstill agreement then they will keep Mittleman sidelined.  I don't think he has the capital to take up AIMIA's offer.  Mittleman's is not a savior - they have run a very poor activist campaign.  I'm inclined to write them off as having any influence on the outcome here.

What a mess... more cash being burned paying for legal bills.

wabuffo

Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 24, 2019, 04:36:31 PM
https://business.financialpost.com/investing/rbc-takes-rare-step-and-throws-support-behind-aimia-in-battle-against-largest-shareholder (https://business.financialpost.com/investing/rbc-takes-rare-step-and-throws-support-behind-aimia-in-battle-against-largest-shareholder)
Quote
Hanif Mamdani, head of alternative investments for RBC Global Asset Management, said the bank strongly disagrees with the criticisms that have recently been directed at the company’s board.  In a statement to the Financial Post, Mamdani called the loyalty rewards firm’s board of directors “seasoned” and “capable” while appearing to brush aside the concerns of New York-based investment firm Mittleman Brothers LLC.

In this case, Mamdani is delivering payback for Mittleman's advocating stranding the preferreds in his letters to AIMIA last year.  Mamdani is sharp and owns 35% of the AIMIA preferreds (though he may have traded some/all of that position into the common once the preferreds paid off their accrued dividends and the value of the preferreds was restored). 

It doesn't feel like Mittleman is winning....

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Pref User on July 25, 2019, 07:25:56 AM
He actually owns way more than 35%, he owns 63% as of the end of 2018. I would be surprised if he was able to get down to 35%. When he was accumulating in the second half of 2018 there was a ton of volume due to the sale of Aeroplan. There hasn't been that much volume since then so don't know how he would have easily sold out of the position.

https://integra.com/wp-content/uploads/AFS/PHN_All_Funds_AFS.pdf   Page 339 for a quick look up

Wabuffo do you mind providing the letter to Aimia about stranding the preferreds? I don't think I came across it. Thank you
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 25, 2019, 07:43:37 AM
He actually owns way more than 35%, he owns 63% as of the end of 2018. I would be surprised if he was able to get down to 35%. When he was accumulating in the second half of 2018 there was a ton of volume due to the sale of Aeroplan. There hasn't been that much volume since then so don't know how he would have easily sold out of the position.

https://integra.com/wp-content/uploads/AFS/PHN_All_Funds_AFS.pdf   Page 339 for a quick look up

Wabuffo do you mind providing the letter to Aimia about stranding the preferreds? I don't think I came across it. Thank you
Given quite low liquidity in the preferreds since the end of 2018, it would be surprising if ownership has changed significantly since then.

For obvious reasons, the risk and reward profile is, at the margin, different vs the commons but but there may be room for common grounds. Interesting to note that Mr. Mamdani is, by far, the largest 'equity' holder in the company and that aspect would make it easier to negotiate an offer if ever a vote is considered for that specific piece of the capital structure.
http://ezine.dmdigital1.com/nov2018ROB/8BB2967FE5A48923238A649AC5749110/Nov2018ROB.pdf
See pages 44-5.
It's still unclear what the end game will be.
Title: Re: AIM.TO - Aimia
Post by: Pref User on July 25, 2019, 09:48:05 AM
This guy was talking out of his ass, his cost base could not have been $10-$12 if he was admitting to owning 60% then. His coast base for series 1 $15.84, series 2 $15.99 and series 3 $18.40. If we do a dividend-adjusted cost base then the series 1 $13.59, series 2 $13.52 and series 3 $15.29.

Now using the 6-month volume-weighted average because of that's the highest figure it would take the series 1 683 days, series 2 580 days and series 3 309 days for the position to be sold out of. The real question now is how he must be asking to himself is how much would he move the each preferred trying to sell out of them. And I think he has come to a conclusion it would be below his cost base by quite a lot.

If we did see this kind of price action it would be because of him and at these price levels even if the preferred become stranded because of Mittleman it means the company isn't rudderless anymore and you would be getting paid fairly well. Over time investors should come back to the preferred shares because at these price levels the series 1 yield is 8.3%, series 2 yield 10% and series 3 yield 10%. This isn't a Dundee or Bombardier situation, so the preferred shares wouldn't justify trading at those yields. But I could be wrong.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 25, 2019, 09:51:40 AM
He actually owns way more than 35%, he owns 63% as of the end of 2018. I would be surprised if he was able to get down to 35%.

I stand corrected.  I had not thoroughly researched his position and was going by an old article that quoted his position size at 35%.  Thanks for the link to the RBC mutual fund reports.  That's very helpful.

Wabuffo do you mind providing the letter to Aimia about stranding the preferreds? I don't think I came across it. Thank you

I'll try to find it, but I thought I read somewhere that Mittleman Bros were not happy with the preferred dividends.  The only reason to do it was to begin the tender offer (in which Mittleman didn't participate.)   Look - perhaps I'm reading between the lines, but I think Mittleman wanted to trap the maximum amount of cash inside this company and begin investing in unrelated businesses to earn good risk-adjusted returns. 

If one's goal is not to liquidate the business (and I'm infering that it is for Mittleman) there is significant value in the preferreds by turning them into trapped equity.  They become a cheap source of capital given their perpetual nature.  There are no protections from what I can tell -  one can just keep the dividends turned off forever.  There is penalty, no accrued interest on top of the cumulative dividends payable, so the cost of capital mathematically declines with time.  There's been many examples of shrewd investors taking over control and stranding preferreds.

for obvious reasons, the risk and reward profile is, at the margin, different vs the commons but but there may be room for common grounds.

I'm not sure that there is common ground - there may be too much water under the bridge.  As you noted, Mamdami's position is too big and he can't easily get out.  Even if it wasn't explicity stated by Mittleman, Mamdami clearly understood the terrain and would be concerned about this risk.  The fact that he is siding with management is protection against predation by Mittleman if they take control of the capital structure.  As you've noted, Mamdani seeks a clear and present danger and his incentives and outcomes are aligned against Mittleman.  Mamdami wants (and needs a liquidation), he gets none of the upside if Mittleman takes over and hits homeruns (doubtful).  Mamdani's best case scenario from a DCF/NPV perspective is a quick liquidation.   Since preferreds are a form of equity, Rabe can argue that Mamdami owns much more equity than Mittleman.

It's certainly is interesting to watch (as a spectator, not investor).

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Tomahawk25 on July 25, 2019, 09:57:56 AM
Correct me if I'm wrong, but there seems to be an assumption, at least among retail investors in Aimia (coming from blogs and posts all over the internet), that the Mittleman Brothers intend to come the rescue for shareholder value.  That Mittleman in control means closing the spread between the stock price and cash & liquidation values. 
The Board of Aimia clearly thinks not, this large preferred shareholder thinks not, and I am wondering if that assumption should be challenged as well.

Is this a battle between various factions, none of them "the good guys", with minority shareholders just risking themselves in a bloody crossfire?  What do you think?  If Mittleman just wants control of the capital structure to invest the cash in their pet projects, why would any investor want to tag along?  Do any of these factions intend to liquidate (Wabuffo just mentioned Mamdami wants that)

Note: I have traded the stock in and out a few times, no position now as of Thursday, 7/25/19, stock at 3.83 CAD.  Would consider it around 3.40-3.50ish, hoping that's enough margin of safety in case of ever more serious Board conflicts. 
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 25, 2019, 11:22:26 AM
For obvious reasons, the risk and reward profile is, at the margin, different vs the commons but but there may be room for common grounds.

One way they could stop the cash going to the preferreds, but not the dividends, is contained in the Series 3 Preferreds Offering Memorandum.
Quote
The holders of the Preferred Shares shall be entitled to receive, as and when declared by the Board of Directors, in  preference and  priority to  any dividends on  the  Common Shares and any  other shares of  the Corporation ranking junior to the Preferred Shares, dividends which may be paid in money, property or by the issue of fully paid shares in the capital of the Corporation

Its not clear if the preferreds could be called by AIMIA and the par value ($25) also be paid out by the issue of fully paid shares in the capital of the Corporation.  That would be something, eh?  Kind of a tactical nuclear strike that would blow Mittleman out of the water and make Mamdami a ~50% holder of the larger amount of common shares outstanding.

I doubt though that Mamdani wants that.
Title: Re: AIM.TO - Aimia
Post by: Pref User on July 25, 2019, 12:21:46 PM
Little confused on your math how Mamdani would have 50% of the shares in your outcome. Current market cap $449.7M preferred share face $322.5M. Mamdani has 63%, so $203.2 M face value new market cap if shares issued $772.2 M, leading to 26.3%. Mittleman then goes down too 13.6%, and the number of people who voted against the board is 15.5% combining with Mittleman this is 29.1% of all shares.

If we say all of that Mamdani votes with the other people who voted for the board and management and everyone who would vote against management it would the same way as the AGM it would be a very tight vote at 56% for the management and 44% against management. So if anyone flip flops on the vote or other people actually vote their shares this time who knows what could happen.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 25, 2019, 12:34:14 PM
Little confused on your math how Mamdani would have 50% of the shares in your outcome.

Math is hard   ;D

Its a hypothetical situation and I wonder if Mamdani could even agree to it on behalf of all preferred holders with his 63% ownership of all the preferred class.  Would the common shareholders get a vote at all in being diluted? 

Its clear the BOD is is willing to pull out all the stops.  It might be interesting for Mamdani to, ahem  8), do the math.  Does he get more (given he now shares in the upside) as a full common shareholder in a liquidation than what he would get as a preferred shareholder ($25 par + any accrued dividends per share).  I guess it depends on what the net asset value per share in a liquidation scenario.  You could see the outlines of a deal between Mamdani and the BOD - but I don't really think its happening.

Makes for an interesting soap opera now that Mamdani has been flushed out into the open in this drama.

wabuffo

Title: Re: AIM.TO - Aimia
Post by: Pref User on July 25, 2019, 12:42:20 PM
If I'm Mamdani I think I would love it to get common, it's way more liquid than the preferred shares. In the most liquid preferred it would take over a year to exit and almost two at the extreme, based on current average volume this would drop down to 59 days.

Earlier I showed what his dividend adjust cost base is. If he got face value in share and was truly looking to get out and not vote at all he could liquidate his position at half the current market price and be breakeven on the investment. If would be hard to clear all of the shares so the price might go down, and then management risks Mittleman scooping up more shares at a much lower price.

But you're right this should be very interesting to play out.
Title: Re: AIM.TO - Aimia
Post by: Pref User on July 25, 2019, 12:55:45 PM
Also rereading that line in the prospectus for the series 3 that sounds to only be with regards to dividends, so maybe they cannot go nuclear on them.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on July 26, 2019, 07:10:02 PM
Cardlytics, FORM S-3  REGISTRATION STATEMENT, filed today
We'll have to wait for the supplement but there is a possibility that the 2.98M shares held by Aimia will be part of the 4M shares offered by the selling shareholders.
https://www.sec.gov/Archives/edgar/data/1666071/000119312519204123/d771079ds3.htm
Title: Re: AIM.TO - Aimia
Post by: wabuffo on July 27, 2019, 04:48:24 AM
Nice find - it does look like this S-3 sets the stage for a sale of CDLX stake by AIMIA.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 05, 2019, 08:58:52 AM
Per Canadian Insider, it looks like Mittleman Bros sold 2m AIMIA shares last Thursday.  It's been drip, drip, drip selling by them but this got my attention.  I know their fund has had poor returns over the last year or so - so is this redemption-related?   They could've met redemptions by offering their investors a chance to participate at the tender at $4.30 per share - now they are forced sellers at $3.70 or so.

They still have a large stake but I wonder if their hand is weakening...

wabuffo
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 05, 2019, 05:30:53 PM
I didn't realize Mittleman Bros investment record was this poor.
http://www.mittlemanbrothers.com/performance/ (http://www.mittlemanbrothers.com/performance/)

A 5-year CAGR of minus 6.7% per year (vs S&P 500 TR CAGR of +10.7% annually). They've been underperforming by 17%+ per year!.   No wonder he's seeing redemptions after his investors got their Q2 statements in July.

The 2m share sale was on July 31st - that was the beginning of the market reaction to the escalation of the trade war.  We'll see what happens with their AIM share holdings this week with the sudden tailspin in the broad indices.  The AIMIA BOD may only need to wait him out and he may no longer be a pain in their side. 

If I were Rabe and BOD, I'd be publicizing MIM's poor performance and asking why AIM shareholders should entrust the Company's strategy to someone with such a poor investment record.  Ouch!

wabuffo
Title: Re: AIM.TO - Aimia
Post by: movys on August 06, 2019, 11:24:05 PM
How intellectually honest of you to mention only the 5-year CAGR when it suits your narrative and ignore the 10-year CAGR that tells the opposite different story or the 17-year (since inception) number that does the same.

Do the math on how much more money you end up with when you outperform by several hundred basis points over such a long period of time.  Investors who have stuck with MIM have done very well.

Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 07, 2019, 05:16:15 AM
The Mittleman group's presence is interesting because they represent a potential catalyst for value realization.
What specific individuals think about their investment record and potential for a 'rebound' is not that relevant in the context of the redemption pressure that the Mittleman team may get for their funds and the effect this may have on Aimia's share price, given such a high concentration in one name. A cynic may say that this would be value accretive for the buyback but waiting for windows of opportunity has a price also.

You know a fund manager is going through 'challenging' results when the commentary starts with: "“Now, just remember that this thing isn’t as black as it appears.” — George Bailey, It’s a Wonderful Life

It's a wonderful life but Revlon is reporting tomorrow.
https://www.brookvine.com.au/wp-content/uploads/2019Q2_Mittleman-Global-Value-Equity-Fund_Qtrly-Report_Class-P.pdf
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 07, 2019, 05:36:38 AM
How intellectually honest of you to mention only the 5-year CAGR when it suits your narrative and ignore the 10-year CAGR that tells the opposite different story or the 17-year (since inception) number that does the same.

I didn't ignore their long-term record, but I don't think its particularly impressive - for two reasons:

1) When I look at the early year results of an investment manager's record, I always assume the AUM was a whole lot smaller - so on a time-weighted, capital-weighted average return basis, I'm guessing most of their limited partners have not outperformed the indices.
2) Even if ignore point 1, I ran their numbers from 2003 through a six-sigma calculation correlated with the side-by-side S&P returns and looked up the result in my handy-dandy z-table.  Their portfolio returns statistically beat 54% of random portfolios based on the S&P.  That's only a bit better than a coin toss.  Statistically their returns are mostly leveraged beta and very little alpha over the entirety of their record.

But my point wasn't to take shots at them.   My main point is that their position may be weaker than appreciated by AIM investors.  Unless a lot of their AUM is their own money, their recent poor record plus current swoon in equities could force their hand by their own investors.

But I understand your concern about my post.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Pref User on August 07, 2019, 06:05:21 PM
How intellectually honest of you to mention only the 5-year CAGR when it suits your narrative and ignore the 10-year CAGR that tells the opposite different story or the 17-year (since inception) number that does the same.

I didn't ignore their long-term record, but I don't think its particularly impressive - for two reasons:

1) When I look at the early year results of an investment manager's record, I always assume the AUM was a whole lot smaller - so on a time-weighted, capital-weighted average return basis, I'm guessing most of their limited partners have not outperformed the indices.
2) Even if ignore point 1, I ran their numbers from 2003 through a six-sigma calculation correlated with the side-by-side S&P returns and looked up the result in my handy-dandy z-table.  Their portfolio returns statistically beat 54% of random portfolios based on the S&P.  That's only a bit better than a coin toss.  Statistically their returns are mostly leveraged beta and very little alpha over the entirety of their record.

But my point wasn't to take shots at them.   My main point is that their position may be weaker than appreciated by AIM investors.  Unless a lot of their AUM is their own money, their recent poor record plus current swoon in equities could force their hand by their own investors.

But I understand your concern about my post.

wabuffo

BURN!!!!
Title: Re: AIM.TO - Aimia
Post by: kab60 on August 08, 2019, 04:42:47 AM
MIM letter out with thoughts on Aimia: https://www.brookvine.com.au/wp-content/uploads/2019Q2_Mittleman-Global-Value-Equity-Fund_Qtrly-Report_Class-P.pdf
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 08, 2019, 06:39:31 AM
CDLX (Cardlytics) out with a good earnings report that the market seems to like - up ~15% in early trading this morning.  So that's good news for AIMIA.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 08, 2019, 01:21:18 PM
I (again) became an AIM.TO shareholder bagholder after today's price swoon.   Of course, that means this thing is heading a lot lower and I will probably regret this little speculation.   8)

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 14, 2019, 05:49:33 AM
Q2 results out.

The message is that management is engaged (for better or for worse) in the transformation of their operating platform. They expect negative cash drag to go down but it’s only a promise at this point and “accretive” acquisitions will decrease the level of cash and investments held (and margin of safety).

In Q2 and since then, the market value of Cardlytics has gone up (I would suspect they’re also doing well with their long-term bonds) and I do not take these numbers in today’s valuation although monetization may be coming soon and hopefully they can achieve an exit at an attractive price point.

Another key part of the puzzle is PLM. PLM is going through a relative soft patch but the underlying business appears to be strong and growing. Adjusted EBITDA increased to 21.3M USD last quarter. One has to reasonably subtract to intrinsic value based on the setup but I continue to think that there is a considerable gap between what is reported (53.2M) and what the business is really worth.

Margin of safety wise, looking at total equity (579M) at end of Q2, subtracting 20M for the completion of the NCIB, subtracting 322M for the prefs and ‘adjusting’ for unrecognized value for PLM and BigLife, I get a ‘floor’ at about 5$ per share (shares outstanding now at about 108.5M). Going forward, there will be a continuous negative cash flow drag from operations and dividends to preferreds (which will continue to cause a 40% tax accrual to grow because of part VI.1 and unprofitable operations for the foreseeable future) but this drag will be mitigated partly by interest income and distributions from PLM.

All in all, I was hoping for more immediate value realization but am still comfortable holding on for now.
Title: Re: AIM.TO - Aimia
Post by: movys on August 14, 2019, 06:21:20 AM
I don’t think anyone expected any immediate value realization with Q2’s report.  Also not a surprise that mgmt is engaged in the transformation of their operating platform.

Curious how you are  “adjusting” your value for PLM in your all-in “floor” of $5/share?  Was nice to hear Rabe confirm that There’s a robust exclusivity clause in their agreement with Aeromexico.

Also doesn’t sound like they are close to announcing any kind of M&A, which is good as it allows some time for the boxing match with Mittleman to play out before mgmt can destroy more value.

Finally, is there a chance mgmt actually  finds a real bargain and creates a ton of value by putting the NOLs to work?
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 14, 2019, 06:52:06 AM
Oh man - they are incinerating cash at a blistering pace!   Not counting the share buybacks, they torched $1/share in cash in Q1 and $0.55/share in cash in Q2.   But look at that adjusted EBITDA improvement! LOL!

They are not building a good negotiating position for themselves vis-a-vis Aeromexico.  If Aeromexico stops the divie from PLM - these bozos are in trouble.

I just don't understand the strategy here.  The buybacks were unnecessary, the payment of dividends and restarting the preferreds was unnecessary.  I'm not sure why they haven't shutdown ILS yet with its cash operating losses.  SMH.

wabuffo



Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 14, 2019, 07:16:31 AM
I don’t think anyone expected any immediate value realization with Q2’s report.  Also not a surprise that mgmt is engaged in the transformation of their operating platform.

Curious how you are  “adjusting” your value for PLM in your all-in “floor” of $5/share?  Was nice to hear Rabe confirm that There’s a robust exclusivity clause in their agreement with Aeromexico.

Also doesn’t sound like they are close to announcing any kind of M&A, which is good as it allows some time for the boxing match with Mittleman to play out before mgmt can destroy more value.

Finally, is there a chance mgmt actually  finds a real bargain and creates a ton of value by putting the NOLs to work?
Gentle reminder: conceptually, it seems we are on the same side of the transaction. It's just we don't sit at the same place in the spectrum. Just read wabuffo for the bozo end of the spectrum. :)

In 'normal' circumstances, PLM's value would be much higher. However, I would challenge you to disclose a specific intrinsic value number without a huge range of potential outcomes. So the 'floor' value is very relative. Why? The PLM evolving saga is different for reasons described earlier in this thread but I remember clearly a time when (it was Mr. Duchesne at the helm then) Aeroplan without Aimia was considered unimaginable and submit that they should have had more imagination. Also, you seem to anchor (correct me if I'm wrong) PLM's value to Mr. Mittleman's assessment and it's interesting to note that, for the Aeroplan franchise, he was way wide of the mark for reasons (retrospectively appreciated for some) that are difficult to reconcile with a rational approach.

I agree with you on the potential upside but wonder if time is your (our) friend here.

Title: Re: AIM.TO - Aimia
Post by: movys on August 14, 2019, 11:33:26 AM
Simply citing the reported cash burn during Q1/Q2 as Wabuffo does above is misleading.  ~$65m of the negative FCF in Q1 came from the one-time dividend used to make whole the old common shareholders.  $24m of the negative FCF during Q2 (almost half the total) came from a one-time $24m payment to HSBC to cover the existing points liability on Air Miles Middle East and was well-telegraphed last quarter.  Finally, another $19 negative FCF came from an unfavorable working capital swing due to more one-time payments and timing of cash receipts.  So that's $109m in negative FCF that has already stopped bleeding out and can be ignored going forward.

Generally speaking, I think time is probably not on our side here and this is a race against the clock to the extent that they continue to burn cash.  So the big pieces you have to get right here, IMO, are PLM and the rate of continued cash burn.

On PLM, I'm curious what basis anyone feels there is for Aeromexico to "just stop paying the div" to Aimia.  They are contractually bound.  And even if Aeromexico decided to risk a lawsuit by withholding cash that rightfully belongs to Aimia, there's is $400m in cash on Aimia's balance sheet it can use to weather the storm before it eventually collects what it is entitled to from PLM.  We have already seen Aeromexico roll out the Air Canada playbook by making an opportunistic bid for PLM when it thought Aimia was vulnerable.  Now that Aimia's balance sheet is so much stronger, I don't know what Aeromexico thinks they will be able to accomplish.  There is no ticking clock on the PLM partnership and it just continues to compound value.  So where's the leverage?  Aimia has told me Aeromexico hasn't even explained what the alleged "irregularities" are and they have no idea what Aeromexico is talking about.  It sounds an awful lot like opportunistic negotiating tactics.  If Aeromexico were going to go nuclear and try to withhold the div, wouldn't they have done that by now?  Hell, even if they kill the div temporarily, Aimia has a $134m stake in Cardlytics it can monetize anytime (shelf registration statement was recently filed).

On the cash burn going forward, let's punitively assume negative FCF will be the same as Q2 in both Q3 and Q4, which is ($32m), excluding one-time payments during Q2.  Going forward, we will see the following during H2:

1) $12m from PLM
2) $14m from working capital unwind ($5m in cash receipts that were pushed into july and $9m from the absence of incentive/insurance payments that happened during Q2)
3) $5m? from headcount reduction benefits
4) ($8m) in preferred divs
5) ($10m) in one-time IT spend to reduce long-term IT costs

So ($64m) cash burn in H2 plus all the above adjustments gets you $50m in negative FCF for the remainder of 2019.

My valuation assumptions:
- PLM: 9x H1 annualized EBITDA = C$485m in value to Aimia
- Cardlytic stake at current quote: C$134m
- Think BIG Digital Air Asia: ascribe zero value even though it has 16m members
- C$396m cash less C$102 restricted cash plus C$65m restricted cash release (expected in 2019 re CRA Tax Audit) less C$21m post-quarter NCIB purchases = pro forma cash of C$338m
- less C$317m preferred shares
- less C$50m cash burn

= C$590m / 108.5m shares

C$5.43/share

What is the right multiple for PLM?  How should we discount it given the current dynamics?  I don't care what Mittleman thinks and I don't know what the right multiple is, but I think 9x is conservative.  What would you pay for a rapidly growing, high-ROIC business with negative working capital and tax advantages that continues to dividend its excess "float" to you as income?  If PLM were a public company I think it would fetch north of 10x.

My cash burn estimates may be a off a little bit and they will probably burn a little in 2020 as well, but it shouldn't move the needle either way.  Offsetting that uncertainty I ascribe no value to Think BIG Digital (AirAsia) or the NOLs, so call it a wash.  Bottom line, current price seems to be discounting all the terrible things than could go wrong and therefore offer a free option on any one of them going right.

Happy to hear thoughts/pushback on the above.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 14, 2019, 05:02:51 PM
Simply citing the reported cash burn during Q1/Q2 as Wabuffo does above is misleading.  ~$65m of the negative FCF in Q1 came from the one-time dividend used to make whole the old common shareholders.  $24m of the negative FCF during Q2 (almost half the total) came from a one-time $24m payment to HSBC to cover the existing points liability on Air Miles Middle East and was well-telegraphed last quarter.  Finally, another $19 negative FCF came from an unfavorable working capital swing due to more one-time payments and timing of cash receipts.  So that's $109m in negative FCF that has already stopped bleeding out and can be ignored going forward.

Movys - here is the core cash flow from the operating business (I'm excluding dividends, the one-time payments you mentioned, etc).

   (http://i67.tinypic.com/wbt0k2.jpg)

The management team has burned over $100m in the first two quarters post-Aeroplan divesture ($136m if include the 'one-timers', but whatever).  I don't for one second, believe this run rate is suddenly going to zero anytime soon.  This is because they generate very little revenue and have a huge, fat corporate overhead that no one is paying for right now. 

They still have to downsize - and guess what, that'll bring more one-time cash outflows to exclude from future analyses.   This has always been my beef with all of the sum-of-the parts analyses.  They all ignored: 1) the ongoing, massive cash burn and 2) the significant one-time exit costs to get rid of the worldwide offices and expensive marketing staff.

I've got a small position that I bought last week, so obviously, I am not disagreeing that there isn't some value here.  But the degrees of freedom are shrinking fast and no help is coming from Mittleman or anyone else.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 15, 2019, 04:47:32 AM
This investment fits in the potentially dwindling margin of safety, absence of clear catalyst and cash burn in the meantime category.

It reminds me of what Mr. Peter Cundill, the regretted and perhaps not well known enough value investor who had described his approach to these kinds of opportunities. In There's always something to do, he mentions an example of a mistake where he had bought a company with valuable assets but which had a cash-losing sub which, in the end, ate away the margin of safety.

It often pays to buy into uncertainty but there does not appear to be, for now, an obvious catalyst. So, for now, buy them cheap and something good will happen? is the mantra.

A quote from Mr. Cundill:
"“One of the dangers about net-net investing is that you buy a net-net that begins to lose money, your net-net goes down and your opportunity to be able to make a profit becomes less secure. So the trade is not necessarily to predict what the earnings are going to be but to have a clear conviction that the company isn’t going bust and that your margin of safety will remain intact over time”.

As far as the Mittleman group, their major holdings (Revlon, AMC) are doing even more poorly than the median stock these days and redemption pressure may become significant. Given the NCIB is finished, I wonder if their block of AIM shares may not even become available for an interested taker.
Title: Re: AIM.TO - Aimia
Post by: movys on August 18, 2019, 08:38:29 PM
I spoke with the CFO a few days ago and thought I'd share the following takeaways:

1) They considered carefully the option of winding down ILS and liquidating the company but decided against it for a few reasons:
a) leaves the substantial value of the tax losses on the table
b) forgoes synergies that would be available with loyalty targets they might evaluate
c) an announced plan to liquidate substantially reduces their negotiating power with Aeromexico re PLM, as Aimia would effectively become a forced seller if they publicly committed to liquidating the company.

2) PLM - The relationship with Aeromexico is governed by two agreements (commercial agreement and shareholder agreement).  The commercial agreement has very firm parameters around it that make it impossible for Aeromexico to "break the contract and find a new partner" before 2030.  The exclusivity clause prevents such action and even if Aeromexico decided to go nuclear and risk a lawsuit over the issue, they would have to convince other Mexican entities (banks, partners, etc.) to do the same, who would all be subject to the same legal outcome.  Finally, as the majority partner, Aeromexico's interest is in increasing the value of PLM, not destroying it.  That they made an opportunistic offer to purchase Aimia's stake not long ago speaks volumes about their real intentions here.

The shareholder agreement grants Aimia major decision rights relative to the business.  Aimia has 3 of the 9 board seats and not much can be decided without them.  Based on this, the business is accounted for as under "joint control" under IFRS.  As part of the shareholder agreement, Aeromexico and Aimia review and agree on the dividend every quarter.  Again, if Aeromexico were to go nuclear and attempt to deprive Aimia of the dividend as a negotiating tactic, the cash would be suspended inside PLM and Aeromexico would have to do without it as well.  Aeromexico's weak balance sheet suggests they need the PLM dividend just as much, if not more, than Aimia. 

3) CDLX - while Aimia cannot compel a follow-on offering, they do have participation rights should CDLX do a follow-on of their own volition, which seems to be in the cards given their recent decision to file the S-3.  However, there is nothing preventing Aimia from selling in the open market today.  Aimia views CDLX as a non-core asset, and while they don't need the cash currently, they recognize that the worst time to monetize an asset is when they NEED cash, and they have no intention to "play the stock market."  The CFO assured me that it is not lost on them that their stake in CDLX represents >1/3 of the value currently being ascribed to the entire company.  So my guess is monetization is a relatively near-term catalyst.  They also confirmed that no material capital gains taxes or other taxes would be due upon selling their stake in CDLX at current prices.

4) They recognize the urgency of reducing the cash burn, and the CFO reiterated the claim on the call that we will see a substantial reduction in cash outflow in the back half of the year.

5) As the stock price continues to become more attractive, the hurdle for sensible M&A implicitly rises, and if they are unable to consummate a deal at what they feel is a very attractive price (and something that is cash generative on day 1) relative to their own stock, they would consider repurchasing even more shares.

Obviously you can decide how you want to discount comments coming from within the organization, but I thought the commentary about PLM and the dividend, as well as CDLX monetization, was encouraging.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 19, 2019, 05:29:54 AM
^Thanks for sharing movys.
I've been trying to kill this thesis (minimizing the positives and maximizing the negatives) but haven't succeeded yet.

2 additional points about PLM:
1-Looking across the airline industry, whether in-house proprietary, with some autonomy or completely separate businesses, loyalty units have become essential elements (this is really a long term and convincing story) with growing value (and big banks are really interested) and an interesting feature is the embedded asset-lite value to continue to contribute to cashflows during downturns. Here are two articles touching on this topic. The content is promotional and relatively one-sided and also contains misquoted information about the Aeromexico-Aimia joint partnership.
https://www.mba.aero/wp-content/uploads/2018/08/mba-Insight-Article-Frequent-Flyer-Programs-Oct-4-2017.pdf
https://www.mba.aero/wp-content/uploads/2018/08/Frequent-Flyer-Programs-Part-Two-1-1.pdf

2-I looked back old notes and re-read a document from 2012, which is no longer available on Aimia's corporate website. It shows how Aimia's input was instrumental in defining the trajectory that PLM has taken. Interestingly, Mr. Rabe was the PLM CEO then. Why did he leave? Did he outgrow the company or did Aeromexico think that they could fly on their own?
http://docplayer.net/35123595-Taking-club-premier-how-aimia-helped-aeromexico-optimize-its-loyalty-program.html
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 19, 2019, 07:19:58 AM
Thanks for the update from mgmt, Movys.

His answer on why not shutdown ILS is both self-serving and idiotic.   

It's also interesting that they acknowledge that Aeromexico has the power to turn off the dividend flow from PLM.  I take your points about why that wouldn't happen.  But wouldn't doesn't mean couldn't in this case of an aggressive strategy to force AIMIA's hand.

Also - on more buybacks, it was my understanding that AIMIA can't do another NCIB until after the anniversary of the one they just completed (but I could be wrong about that).  So they may be out of the market for awhile.  Not that their previous repurchases were astute anyway - so maybe this is good news.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: movys on August 19, 2019, 06:04:59 PM
^Thanks for sharing movys.
I've been trying to kill this thesis (minimizing the positives and maximizing the negatives) but haven't succeeded yet.

2 additional points about PLM:
1-Looking across the airline industry, whether in-house proprietary, with some autonomy or completely separate businesses, loyalty units have become essential elements (this is really a long term and convincing story) with growing value (and big banks are really interested) and an interesting feature is the embedded asset-lite value to continue to contribute to cashflows during downturns. Here are two articles touching on this topic. The content is promotional and relatively one-sided and also contains misquoted information about the Aeromexico-Aimia joint partnership.
https://www.mba.aero/wp-content/uploads/2018/08/mba-Insight-Article-Frequent-Flyer-Programs-Oct-4-2017.pdf
https://www.mba.aero/wp-content/uploads/2018/08/Frequent-Flyer-Programs-Part-Two-1-1.pdf

2-I looked back old notes and re-read a document from 2012, which is no longer available on Aimia's corporate website. It shows how Aimia's input was instrumental in defining the trajectory that PLM has taken. Interestingly, Mr. Rabe was the PLM CEO then. Why did he leave? Did he outgrow the company or did Aeromexico think that they could fly on their own?
http://docplayer.net/35123595-Taking-club-premier-how-aimia-helped-aeromexico-optimize-its-loyalty-program.html


Thanks for sharing.  Note that in 2012 Aeromexico and Aimia agreed to a value for PLM of $518m (C$3.10/share today) when members and gross billings were HALF of what they are now.  Mexico's population and middle class are growing, credit card adoption is increasing, and PLM currently has only 5% penetration.  The growth runway here is long and even though everybody is using modest numbers for conservatism, fair value for PLM should really be north of $1B.
Title: Re: AIM.TO - Aimia
Post by: movys on August 19, 2019, 06:18:58 PM
Thanks for the update from mgmt, Movys.

His answer on why not shutdown ILS is both self-serving and idiotic.   

It's also interesting that they acknowledge that Aeromexico has the power to turn off the dividend flow from PLM.  I take your points about why that wouldn't happen.  But wouldn't doesn't mean couldn't in this case of an aggressive strategy to force AIMIA's hand.

Also - on more buybacks, it was my understanding that AIMIA can't do another NCIB until after the anniversary of the one they just completed (but I could be wrong about that).  So they may be out of the market for awhile.  Not that their previous repurchases were astute anyway - so maybe this is good news.

wabuffo

Agree on his ILS answer.

I wouldn't say it's as simple as Aeromexico having the "power" to turn off the div.  It's a board-level decision that requires the support of Aimia and I'm not even sure how Aeromexico could mechanically pull it off.  Probably involves their suing Aimia for these "irregularities."  But the time for that has passed.  Aeromexico had a shot at "forcing Aimia's hand" when the cloud of the Aeroplan redemption liability was still hanging over their head.  They took that shot and failed.  Now that Aimia is cash rich (and about to become cash richer when they monetize CDLX), I don't think Aeromexico has any leverage anymore.

On the buyback, you are correct about the rules regarding an NCIB, but they can initiate another SIB at anytime.
Title: Re: AIM.TO - Aimia
Post by: movys on August 19, 2019, 06:24:32 PM
Things heating up.

Imminent submission of 5% requisition demand for a special meeting by the other group of shareholders with a slate of 4 new directors.  Company then has 140 days to call the meeting (late Dec / early Jan).

Mgmt would be replaced and loyalty business shut down asap.

Only question is why give this interview before doing it and give mgmt a heads up?  Do it first, then start the PR blitz.

https://www.bnnbloomberg.ca/company-news/video/ceo-jeremy-rabe-needs-to-go-aimia-shareholder-charles-frischer~1757536
Title: Re: AIM.TO - Aimia
Post by: mateo999 on August 19, 2019, 07:11:42 PM
CEO Jeremy Rabe needs to go: Aimia shareholder Charles Frischer

https://www.bnnbloomberg.ca/company-news/video/ceo-jeremy-rabe-needs-to-go-aimia-shareholder-charles-frischer~1757536
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 20, 2019, 04:27:48 AM
^I'm not sure what to think of Mr. Frischer. He sounds like a short-term-minded activist which is not, by itself, necessarily a bad thing but I would like to hear more about  the alternative(s) when he says 'something' has to be done.

It seems to me he's still in the gathering-forces period and the interview may have been pre-emptive, in the sense, for instance, of potential developments referred to in the interview (short segment starts at 4:01) when he describes that, "over the weekend", he heard that the looking-for-further-entrenchment management was in "discussions" to sell 25% of the company to an "investment firm". That sounds very much like what wabuffo described vs the potential preferred to common 'swap'. So, mostly conjectures but Mr. Hamdami could possibly negotiate temporary support in exchange for an interesting and opportunistic entry point into non-stranded ownership.
Title: Re: AIM.TO - Aimia
Post by: movys on August 20, 2019, 10:10:02 AM
This is, indeed, very fascinating.  If Frischer had knowledge of an internal plan to swap the preferreds for common, I'm not sure he would've used the phrase "sell 25% of the company." 

Does anyone understand what limitations there are around such a transaction?  Does the prospectus of the preferreds even allow for such a swap?  Would mgmt need agreement of 100% (or some lower threshold) of preferred holders?  Do common holders have to approve something so dilutive?

Even if something like this were possible, I'm skeptical this would be in Mamdani's interest.  He would then be a common shareholder of a company with an even more deeply entrenched mgmt team whose interests would no longer be aligned with his own, making a quick liquidation and, by extension, an closure of the gap between the current price and fair value even less likely.  Sure, Mamdani would get "liquidity," but liquidity in a security suddenly likely to be worth less isn't necessarily good, especially when he would have a very hard time exiting the investment without crushing the stock on his way out.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 20, 2019, 10:48:56 AM
This is, indeed, very fascinating.  If Frischer had knowledge of an internal plan to swap the preferreds for common, I'm not sure he would've used the phrase "sell 25% of the company." 

He was awkward and stiff during the interview.  He also used hyperbole and stretched his language - like saying his action was being undertaken "by Canadians for Canadians " because his wife is Canadian and his kids dual-citizens while teleconferencing in from Seattle.  LOL.  Let's be honest - he's trying to mobilize shareholders to his side - "sell 25% of the company" (cue ominous music) is better for him to say than "equity exchange in liquidation-value neutral swap".  He wouldn't be the first activist to try to scare shareholders in order to win them over.

Does the prospectus of the preferreds even allow for such a swap?

The prospectus that I looked at allowed Company management to pay preferred dividends in common shares, in lieu of cash.  It didn't explicitly say that they couldn't redeem the preferred in common shares.  But how far of a stretch is it to redeem the preferred in common shares, in lieu of cash, if they can do it for the dividends.

Even if something like this were possible, I'm skeptical this would be in Mamdani's interest.

Why not?  If his preferreds can get redeemed in exchange for common shares at something close to par value ($25 per share), when they are currently trading at ~$18, why wouldn't he take the deal (or a deal for a portion of his preferreds).   He's smart and probably agrees that at current prices, the common shares he gets in exchange are likely undervalued. 

Mgmt could easily "sell" this idea to current shareholders by explaining:

        1) that there is no loss or dilution because total equity (preferreds valued at par + common at fair mkt value) doesn't change, and
        2) it stops a cash drain in the form of the ongoing preferred dividends. 

I'll admit, when I heard Frischer's comment, I too, like CB, thought "Mamdani!"  Of course, we don't know what's going on - but I haven't had so much fun with one stock in a long time.  It's never boring being an AIMIA shareholder! (and I again am one now  :( )

wabuffo
Title: Re: AIM.TO - Aimia
Post by: movys on August 20, 2019, 12:12:37 PM
Why not?  If his preferreds can get redeemed in exchange for common shares at something close to par value ($25 per share), when they are currently trading at ~$18, why wouldn't he take the deal (or a deal for a portion of his preferreds).   He's smart and probably agrees that at current prices, the common shares he gets in exchange are likely undervalued. 

Mgmt could easily "sell" this idea to current shareholders by explaining:

        1) that there is no loss or dilution because total equity (preferreds valued at par + common at fair mkt value) doesn't change, and
        2) it stops a cash drain in the form of the ongoing preferred dividends.


Yes, but that analysis assumes Aimia's share price will be unchanged after such a transaction is announced, and that is a big assumption.
Title: Re: AIM.TO - Aimia
Post by: Pref User on August 21, 2019, 07:02:29 AM
This is in the prospectus (it won't let me post an image), Page 9 of the Series 3 prospectus, it is also in the Series 1 prospectus as well.

"Shareholder Approvals as a Class

Subject to applicable law, any approval of amendments required by law or by the articles of the Corporation in respect of the rights, privileges, restrictions and conditions attaching to the Preferred Shares, as a class, and any other approval to be given by the holders of Preferred Shares, as a class, may be given by a resolution passed by an affirmative vote of at least two-thirds of the votes cast as duly called and held meeting of the holders of the outstanding Preferred Shares. At any meeting of holders of Preferred Shares as a class, each such holder will be entitled to one vote in respect of each Preferred Share held." 

I interpret this like this, RBC guy can go to the board and say pay me face value in common and I will vote for you. They instantly would get series 1 & 2 because RBC has 71% of the outstanding, series 3 only 55% so other preferred shareholders would need to get on board too. But why wouldn't they,  series 3 around 18 and they instantly get par at 25 in more liquid security and could participate in the upside. The NAV slightly changes because there are more shares to split the pie with. RBC guy would love this because liquidity is huge for him, the most liquid preferred share would take him a year to sell out of where the common it would take half a year. RBC guy could also take a beating on the common share price and be better off. I've done the math on the dividend-adjusted cost base and the RBC guy could have the common share price cut in half and still be breakeven on the investment, which i think he would be happy with since sweating so much on what's been going on and his thesis breaking.

Aimia would love this too because they would carry the day no problem. I recalculated the last vote switching Mittleman over and all of the preferred shares convert to common but only the RBC guy votes for the management.  The person with the least votes for would be Mittleman with 54% of the vote if that helps give you an idea.

Wabuffo is right, this could be the backdoor dealing that management does to protect themselves.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 21, 2019, 07:26:38 AM
Wabuffo is right, this could be the backdoor dealing that management does to protect themselves.

Its very diabolical.   >:(

If they don't do it to entrench themselves, then mgmt is even stupider than I thought (a low bar to begin with).

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 21, 2019, 07:41:25 AM
^You may want to consider the possibility that, in addition to the entrenchment issue, management may want to strengthen their negotiating position vs Aeromexico.

They are defining a very credible threat (against Mr. Mittleman and opportunistic Aeromexico) and the dilution issue could be lessened by a redemption cash component coming form monetization of Cardlytics.

The big question is to determine if the dumb or the shrewd part will prevail. I continue to think that a negotiated and reasonable exit for all remains the best option.
Title: Re: AIM.TO - Aimia
Post by: movys on August 21, 2019, 09:40:49 AM
^You may want to consider the possibility that, in addition to the entrenchment issue, management may want to strengthen their negotiating position vs Aeromexico.

They are defining a very credible threat (against Mr. Mittleman and opportunistic Aeromexico) and the dilution issue could be lessened by a redemption cash component coming form monetization of Cardlytics.

The big question is to determine if the dumb or the shrewd part will prevail. I continue to think that a negotiated and reasonable exit for all remains the best option.

Could you elaborate on how a preferred/equity swap constitutes a threat to Aeromexico and strengthens Aimia's negotiating position?
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 21, 2019, 12:54:11 PM
^You may want to consider the possibility that, in addition to the entrenchment issue, management may want to strengthen their negotiating position vs Aeromexico.

They are defining a very credible threat (against Mr. Mittleman and opportunistic Aeromexico) and the dilution issue could be lessened by a redemption cash component coming form monetization of Cardlytics.

The big question is to determine if the dumb or the shrewd part will prevail. I continue to think that a negotiated and reasonable exit for all remains the best option.

Could you elaborate on how a preferred/equity swap constitutes a threat to Aeromexico and strengthens Aimia's negotiating position?
The underlying assumption implies that Aeromexico wants to repatriate the loyalty unit and then the Air Canada playbook is the most helpful reference point. I assume the buying decision will be influenced by their own capital flexibility, by the amount of cooperation thay they may get from partners (Delta or credit card issuers) AND also the vulnerability of the prey.
The substance of the preferred shares, in this specific case, is defined by a fixed income nature, a potentially permanent status, a tax-potentiated dividend, a disproportionate position in the equity structure and basically are majority-held for voting purposes.

During the Air Canada saga, both Air Canada and Aimia defined and reported a plan B in order to maximize the outcome of plan A: the change in ownership of the Aeroplan franchise. I would submit that what Aimia did (real and potential partnerships with Porter, Air Transat, One Alliance and others) came with real costs (8.6M termination fees according to purchase documents) but the real and projected investments in plan B were worth it.

This time around, if Aeromexico has any wherewithal to go ahead, I would say the price paid will be in correlation to the perception of how long Aimia could wait before letting go of the crown jewel. The described swap could go a long way in building a structure made to last and could allow Aimia to play hard to get, to a certain degree.

In the summer of 2018, things started to really get going when Aimia made it clear that it was ready to go separate ways. At the time, I thought it was somewhat reckless but, in retrospect, I now think that it was the right thing to do.
https://nationalpost.com/pmn/news-pmn/canada-news-pmn/newsalert-aimia-porter-airlines-form-new-aeroplan-points-partnership

Yogi Berra would have said, considering decision-making: When you come to a fork in the road, take it.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 21, 2019, 02:10:53 PM
CB - great analysis.

I would only add that these negotiations are always described as two-way (between the airline frequent flier point issuer and the loyalty company that owns the program).  But in reality its a three-way and must include the banks whose credit cards are tied to the program.   The banks have invested hundreds of millions to sign up credit card customers and get their card to the front of the wallet.

The front of wallet credit card position is the most valuable position to be in for a bank (especially with high-spend consumers who correlate with frequent flier travellers).  The bank gets most of the spend fees charged to merchants and a portion of the interchange fees (along with some interest income from consumers who run a balance).  But most importantly they also get very low delinquencies.   Where you don't want to be as a bank is in the second or third position credit card in a consumers' wallet.   You get little spend and oversized delinquencies (because a consumer will start to use this card when they're maxed out on the front-of-wallet card) - making these cards losers for the banks.  That's why banks really pay up for these 'pole-position' cards.  They are hugely profitable for the banks because consumers really use them to the max.

What I never see discussed is that the loyalty company kind of holds the banks hostage because unless a deal happens the consumer's points are stranded.  This is a winner for the loyalty company because they can gate and devalue the points if they are going to lose the airline agreement.   This buttresses CB's point about staying power.  If you are in the loyalty business, you must view the deferred revenue as float and ensure that you are allocating this capital wisely in order to build up a pool of investment assets with high returns.  When you arrive at these negotiation points in the loyalty contracts, you are in a strong position like Buffett was with Blue Chip Stamps.

But a torn up loyalty contract is disastrous for the banks.  Their credit cards are taken hostage and their bank customers are pissed.  The banks then have to replace the loyalty card with marketing spend to retain their customers (though many of their former customers will be lost to competitor cards as other banks poach them in the FUD created by the broken deal).  Thus, the banks have the most to lose AND the most money available to broker a deal.  AIMIA needs to make them the pinata in the Aeromexico dispute.

Right now, AIMIA has to do two things:
1) Demonstrate staying power in terms of balance sheet strength, (something they didn't do during their absolute panic after the AC/aeroplan announcement - ie, cutting a common dividend days after they announced a record date for it).
2) Willingness to walk away from a deal and burn down the points via gating and devaluation.

It is point no 2 that puts them in a weaker position here than in the Aeroplan negotiations.  They don't have control of the PLM structure.  PLM and Banco Santander/AMEX could negotiate a wind-down deal for PLM that Aeromexico could force onto AIMIA.   AIMIA would then get liquidation proceeds in 2030 when the PLM structure is liquidated using the cash proceeds from the "sale" to Aeromexico and the banks of the Club Premier program.  Meanwhile Aeromexico would get their share of the PLM liquidation equity plus payments from the banks for taking on the transferred loyalty points balances.

Might this be an ok deal for AIMIA?  If I were Aeromexico and its banks I would paint the financial picture (chart of dividends to 2030 and final liquidation) and let AIMIA figure out the NPV of what would be equivalent net proceeds today. 

So just for giggles, let's model it. 

I'll use $20m USD of dividends every year from today to 2030.  Then I figure Club Premier (and its deferred revenue liability) gets purchased from PLM for $300m USD (using AC's purchase of Aeroplan as a benchmark) in 2030 and ignore liquidation costs (severances, leases, executive plan windups, etc).   Aimia gets 49% of that and let's discount the cash flows at a 7% rate.  I get a DCF of $220m USD - which is what I have currently plugged into my Net Liquidation Asset Value model.  You might argue $300m is too low for PLM - but remember Aeromexico would make the same argument as Air Canada - its actually $300m USD plus the assumption of maybe a billion USD of points liabilities.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 21, 2019, 06:26:22 PM
^OK, let's walk through the wind-down deal that you are proposing as a potential alternative.

Loyalty programs in general (not in the airline industry) often fail and are then stopped or put in run-off but voluntarily winding down what appears to be such a growing and profitable program would be very unusual, especially 11 years before potential expiration. From reported numbers, all aspects of the loyalty program seem to show positive results: customer acquisition, retention, wallet share of relevant spenders, customer insight about behavior and preference, quite predictable and recurring cashflows as well as market-leading position.

-Notwithstanding the legal aspect, would the PLM program be stopped immediately or phased out slowly?
Stopping now seems to be a no-go from the start. Aeromexico could initiate their own program from scratch (sounds like a risky and expensive alternative, with additional risks of losing customer loyalty) or could? transition to another existing program such as the Delta loyalty platform, raising the possibility of an easier transition for the customers but the transition would likely be over within 2 or 3 years, at the most, given the typical half-life of points and the awkwardness related to having two concurrent programs. Also, this 'strategy' means that all relevant commercial partners and merchants as well as the financial partners would go along... The customers could continue to redeem old points but would need to accumulate points or miles with the new program. I don't see how starting winding down PLM now could last until 2030. If 2030 is the deadline, this wind-down scenario may start to apply around 2027. In the meantime, incentives seem to be aligned for continued profitable growth. There would be a price linked to early killing of the goose that lays the golden eggs.

-The legal aspect has uncertainty because shareholders' agreements are complex and subject to interpretation and litigation in this case would involve many jurisdictions, including Mexico. But I suspect that Aimia has secured basic transfer restrictions for both the operations and ownership. When siamese twins are separated, it sometimes means that one of them has to die. The dying siamese twin does not decide and cannot ask for reparation. But Aimia can. This was, after all and in substance, a joint partnership agreement with so-called joint control.

I agree that Aimia should not be blindfolded to the fact that Aeromexico could use the proceeds of an early piñata fiesta.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 21, 2019, 07:11:51 PM
Perhaps - I didn't explain the scenario fully.

1) Aeromexico makes a decision today that at the end of the contract with PLM in 2030, it will not renew and, instead, Aeromexico will terminate/let expire the contract with PLM for the Club Premier program. 
2) It informs PLM that starting in 2030 after the contract expires, it will operate its own in-house program that will replace Club Premier.  It will respect the contract til then and will not take any actions to initiate its own in-house program until two years prior to the expiry date.
3) As a consequence, starting in 2028, Aeromexico will transfer its voting rights in PLM (but not its economic rights) to AIMIA. 
4) Aeromexico offers as an alternative that it will negotiate a possible transaction with PLM/AIMIA in order to purchase the Club Premier program, trademark and its points liabilities.  This is the reason for transferring its voting rights to AIMIA - so that it is not conflicted during the negotiations.  Its votes are AIMIA's to vote on any deal.
5) If the two parties can reach a deal (which includes a transfer of Club Premier as well as a liquidation plan for PLM), then this is the preferred option.  If not, the two partners will own a loyalty company with no airline affiliate and AIMIA can maintain its ownership of Aeromexico's voting rights (though Aeromexico continues to maintain its economic stake). 
6) Under a no deal scenario, Aeromexico sees its ownership stake in PLM fall in value.  But it benefits from the one-time cash inflows that come from rebuilding the deferred revenue liability to steady-state and negotiates one-time significant payments from the credit card companies who are bailing from PLM.  In my mind - either option A (deal) or option B (no deal) offer similar cash economics to Aeromexico.

This is basically a replay of Air Canada's attempt - but on a slow motion track.  I think this is why Aeromexico is threatening legal action against the current contract and also making noises about starting up its own in-house frequent flyer program.  If Aeromexico follows the plan laid out above, they don't breach the current contract and are within their rights to terminate the deal at the end.  But in this approach they retain ownership rights and get to share in the liquidation of PLM while being in a position to buy out the Club Premier assets/liabilities like Air Canada did. 

This approach also squeezes AIMIA hard because Aeromexico doesn't have to buy out PLM (which was the assumption all along by the bulls). Instead Aeromexico creates a situation where they buy the asset and take on liabilities (which cost pennies to the dollar to them vs accounting value) and don't have to pay much for it.

I think this would be a hardball approach and I think it would work towards getting lower expectations from AIMIA in terms of a deal today.  If not, Aeromexico would just follow the plan laid out and endure a frosty partnership til 2030.   

I'm trying to envision how I would play the situation if I was Aeromexico's lead on negotiations....

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 21, 2019, 08:09:24 PM
...
I'm trying to envision how I would play the situation if I was Aeromexico's lead on negotiations....
wabuffo
I see what you mean and am just (temporarily) trying to think like the negotiator on Aimia's side.
Basically you're discounting a bearish base case scenario for expected cash flows including a terminal value that would correspond to an entity put in run-off while glossing over transition operational costs and risks that Aeromexico would have to face in 10 years, maintaining in the interim a joint structure with a partner to whom you just explained what the partnership is really about.

I see the picture and the problem with the airline anchor partner but still prefer the Aeromexico scenario over the Air Canada scenario. I wonder if Air Canada was not better prepared (already had a small in-house program, had worked with the Aeroplan intangible assets under their corporate umbrella before and they still put aside the positive cashflows coming with a new program and transferred a mountain (even if discounted) of deferred liabilities). I also submit that the distant 2030 deadline increases the odds that present valuation, if applicable, will involve an input related to present free cashflow generation and growth in the interim. If I were the Aimia representative facing such a position now, I would tell the Aeromexico partner to re-evaluate the PLM ownership situation in two or three years (don't call me, I'll call you) and would then speak to the CFO to strengthen the balance sheet. :)
Title: Re: AIM.TO - Aimia
Post by: Pref User on August 22, 2019, 07:45:01 AM
I think the one thing wabuffo you should consider is that I believe I read on the Aeromexico call that their bank and credit card contracts are up for renewal in 2025. This could possibly allow Amerixco to wait to breach the contract or void it much sooner than 2030, as Aeromexico breaks the deal and they then negotiated with banks and card companies to start something in 2026. 

Wabuffo I agree with what you wrote about the front of the wallet comment in Canada, but I think for Mexico it would be different. Canada is a saturated market with only two competitors in travel, so screwing over the Aeroplan customers and the banks in Canada would have been bad and plays into what you wrote. But in Mexico, this could just be a temporary blip on the radar and not be an issue in the long run. I couldn't find income level by population data to say how big the market is for the loyalty card, but with a country of 130 M or so and a growing middle-class thesis like all emerging economies I don't think pissing off the 6.5M members right now would be that bad when evaluating just breaking away. As well consumers are really short term minded and in a couple of years could switch over to whatever the new Aeromexico program is.

The other thought going back to my opening comment, if Aeromexico negotiates a deal to leave with the banks in 2025 and PLM is left stranded the margin of safety to at least realize some value is US airlines. US airlines have actually been stealing share domestically and internationally from Mexican airlines. Aeromexico is the biggest and I am guessing people flock to them because of their international reach compared to peers, making a US loyalty partner very attractive to Mexican members for the same reach, again assumption we'll have to see. The international reach is what made Aeroplan so attractive to members in canada.

Also I agree that converting the preferred shares over would help with negotiating power. From my simple cash burn model in 2021 if there is no preferred dividend and the taxes related to in, then the cash flow turns slightly positive. With a no cash burn scenario like everyone is saying Aeromexico loses its position of power. My only counter to this is that my estimates are slightly positive but with the PLM dividend, so if Aeromexico cuts the dividend off then Aimia would be back in a cash burn scenario and change the power back to Aeromexico.

A final thought in this ramble, if the value of PLM is capped around $250 M USD is everyone scared that management and whoever takes over Aimia is wasting money on buybacks? The buybacks to me essentially are long out of the money call options on the company, and what we know about options most expire worthless. I put the share right around fair value at these prices, which means at 152M shares they were over paying, yes I know they had excess cash then and it changes somethings, but I get it is fairly valued right now on a $250 M USD PLM. I think a lot of people have a flaw in their NAV with BIG loyalty, again i wish i could post images, go look up Air Asia's annual report for 2018. In December 2018 Air Asia bought a 10% chunk of BIG from another owner to increase their ownership to 80%, the transaction valued  BIG at $120 M USD, if you are using Mittleman's valuation of $80 M USD you are really overstating the valuation in your NAV. Based on this recent transaction for BIG Aimia's stake is worth $24 M, and maybe you say they pay a control premium and you can boost it up to $40 M. The overall effect on your NAV for the shares is a $0.50/share swing in valuation.

Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 26, 2019, 06:16:56 AM
https://corp.aimia.com/news/
I would say a step in the right direction.
Title: Re: AIM.TO - Aimia
Post by: movys on August 26, 2019, 01:16:58 PM
I'm surprised they couldn't get the shares off at a price closer to the current quote, but this is definitely a positive.  Balance sheet even stronger now.

I continue to think Aeromexico has much less flexibility than they are being given credit for.  Wabuffo's point about this really being a 3-way negotiation is spot on, and the reality is that the banks are highly unlikely to go anywhere.  The banks have spent millions acquiring these customers and they are highly profitable for the banks (someone has to pay for the miles given away when you get a new credit card).  If banks were to cancel the relationship with Club Premier and move those customers to another loyalty program, the banks would become liable for the deferred liability to their customers when they cancel the Club Premier points.  Banks do not want to pay twice for the points they've issued and they do not want to deal with lawsuits for refusing to issue new points.

Imagine you're a customer with a Banco Santander PLM credit card and your bank tells you that you now have a Banco Santander platinum card.  So you call Santander and ask what happened to your PLM points.  Well, you still have them over at PLM and you can spend them, but you don't have enough for a flight and you have no way to earn any more to get the flight.  So your 2 options are leave those points stranded (which most people won't do) or don't spend on your new platinum card and instead get a new PLM card with its new bank partner so you can keep accumulating PLM points. 

I think what's getting lost here in all the analysis about how Aeromexico can "break" the contract early is that while it may be easy to get people to sign up for a new card, it is well nigh impossible to get them to actually put that new card in the “front of wallet” position for spending. The average PLM customer has been with the program for several years now, and their default credit card for all online and recurring purchases is PLM.  It’s inconvenient to earn points through more than one program as it is harder to ever earn enough to get any rewards.  No one wants to leave stranded rewards when switching cards and there are practical inconveniences in switching cards.  Therefore, it’s highly doubtful that Aeromexico can build its own new program without spending an enormous amount of capital (which they don't currently have) over a long period of time.  And they are even less likely to successfully target existing PLM members for the reasons stated above.

This is why when a loyalty program changes, the bank either gives new points equal to the existing points (huge added expense of moving a program) or the banks don't move in the first place.
 Remember how TD came in with the Aeroplan card for CIBC holders when they took over the card base?  TD probably would have preferred their own redemption option, but it was impossible if they wanted to keep the cardholders.  Same deal here.

So...adjusting for all the post-quarter activity (completion of NCIB and CDLX monetization) and the C$65m restricted cash release expected any time now from the CRA tax audit, Aimia now effectively has C$400m in cash on their balance sheet, or C$3.66/share vs a C$3.25 stock price.  In addition, they still have 1.5m CDLX shares currently worth another C$0.62/share.

So we now have:
current px - 3.25
shs - 108.5m
equity - 353m

PF cash - 398m
remaining CDLX value - 68M
preferred - (317m)

Total observable value excluding PLM / Think BIG Digital / NOLs - 148m

implied value of PLM / Think BIG Digital / NOLs - 204m

Let's call Think BIG Digital a zero even though it has 16m members.

At Aimia's 48.9% stake, an implied value of 204m grosses up to 314m USD for all of PLM.  I think this figure is absurd given the difficulties / complexity of Aeromexico trying to "go-it-alone."  It's even more absurd when you consider the fact that Aeromexico and Aimia agreed to a valuation of $518m USD for PLM when Aimia increased their investment back in 2012, when membership in the program and gross billings were half of what they are now.  Indeed, there were rumors in 2015 of Aeromexico planning to IPO PLM at a valuation of $1B.
Title: Re: AIM.TO - Aimia
Post by: movys on August 26, 2019, 01:19:13 PM
Also, Wabuffo...in your liquidation scenario for PLM (20m USD in divs from 2020 - 2030 plus add'l 300m in 2030) I get pv of $300m at a 7% discount rate, not that I think that approximates fair value... 
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 26, 2019, 01:37:56 PM
Also, Wabuffo...in your liquidation scenario for PLM (20m USD in divs from 2020 - 2030 plus add'l 300m in 2030) I get pv of $300m at a 7% discount rate, not that I think that approximates fair value... 

Movys - the $300m terminal value in 2030 is the total net liquidation assets.  Its split between the equity holders, so in my analysis, AIMIA gets 48.9% of the $300m (~$147m).  Sorry about the confusion. 

wabuffo
Title: Re: AIM.TO - Aimia
Post by: movys on August 26, 2019, 02:11:17 PM
Also, Wabuffo...in your liquidation scenario for PLM (20m USD in divs from 2020 - 2030 plus add'l 300m in 2030) I get pv of $300m at a 7% discount rate, not that I think that approximates fair value... 

Movys - the $300m terminal value in 2030 is the total net liquidation assets.  Its split between the equity holders, so in my analysis, AIMIA gets 48.9% of the $300m (~$147m).  Sorry about the confusion. 

wabuffo

ok that's clear, thanks.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 26, 2019, 02:27:11 PM
AIMIA really took a haircut in order to sell CDLX, eh?   Not including today, average price of CDLX since the last earnings release (12 trading days) was $33 per share.   If I take the numbers from the press-release ($44.9/1.5m shares), they got $29.93 per share.  That's a 10% "liquidity" discount that needs to be factored into the "fair market value" of the last tranche to be sold. 

wabuffo
Title: Re: AIM.TO - Aimia
Post by: movys on August 26, 2019, 03:44:01 PM
I agree it's surprisingly low.  I wonder if this was already in the works before CDLX reported a couple weeks ago.

In the end this is a rounding error on whether this idea works out.  Knocking 10% off current value of CDLX for their remaining stake reduces value by 8 cents/share...
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on August 26, 2019, 04:29:54 PM
AIMIA really took a haircut in order to sell CDLX, eh?   Not including today, average price of CDLX since the last earnings release (12 trading days) was $33 per share.   If I take the numbers from the press-release ($44.9/1.5m shares), they got $29.93 per share.  That's a 10% "liquidity" discount that needs to be factored into the "fair market value" of the last tranche to be sold. 

wabuffo
I agree it's surprisingly low.  I wonder if this was already in the works before CDLX reported a couple weeks ago.

In the end this is a rounding error on whether this idea works out.  Knocking 10% off current value of CDLX for their remaining stake reduces value by 8 cents/share...
I get it that it is important not to forget the downside but the IPO price in February 2018 was 13$ and the stock has traded above 30$ only about 3% of the time since the IPO and all in the last 18 days. Also, when the S-3 was recently filed, the proposed maximum price was 27.02$. It is hard to come up with a precise valuation for Cardlytics and maybe this is only the beginning but a related message may be that it is better to decide the timing of asset sale in order to maximize the outcome.

To keep a close eye on the downside and potential turbulence, it looks like Mexican winds may not be favorable for cashflows emanating from operations as Aeromexico seems to be going through a soft patch. Aimia may have to wait for the right pitch.
https://centreforaviation.com/analysis/reports/latin-american-aviation-gol-and-aeromexico-uneasy-about-capacity-487864
Title: Re: AIM.TO - Aimia
Post by: Pref User on August 27, 2019, 12:55:56 PM
I think I screwed up with my analysis and one thing I overlooked was yes I saw the value in the bloomberg article in 2015 valued PLM at $1B USD, and Mittleman talked about 10 EBITDA valuation but I never considered if Aeromexico had the financial capacity to actually offer $485M USD to buy Aimia's PLM stake. I just looked at this now and Aeromexico Debt/EBITDA is 7.6 times, for reference Air Canada is at 2.9, Delta at 1.9 and Latam 4.2. Investors must also adjust the cash on the balance sheet, yes they have $500M USD+ in cash but of that amount what is actually free to spend is $60M - $75M.

For reference Latam bough out their publicly traded loyalty program in Brazil for $290M-$315M I saw. Latam again has almost half the leverage as Aeromexico and Latam's average FCF over the last 5 years is $116M compared to Aeromexico's of $61M. Aeromexico's current market cap is $525 M USD, so if they were to actually pay $485M USD for PLM, someone needs to tell me where the hell the money is coming from because they would be fools to raise equity and taking on debt to buyout PLM only slightly helps the leverage figure going down to 7 times the combined company EBITDA. Paying $180 M USD the consolidated company leverage goes down to 5.1 times leverage. For refence my earlier numbers do not include Aeromexicos share of PLM EBITDA, so for reference, it goes down to 5.2 times from 7.6, and then if they paid $485 M USD it means the leverage actually jumped from the current level by almost two turns.

I know some will say that Delta could buyout Aimia's stake, but Delta knows everything that I just wrote. Why would they pay anything higher than what Aeromexico is offer +$1? By Aeromexico saying they are canceling the PLM contract when it is over essentially makes it a two-horse race if that between Delta and Aeromexico. What other buyer is going bet they can convince Aeromexico they can change their strategy.

With what Cigarbutt posted about the market also concerns me. I use to think well PLM could try and pivot and combine with one of the other Mexican airlines, but checking financials now they are no different with 6 times Debt/EBITDA. If overcapacity is coming, some of these airlines will disappear. What then? I think the only out then is an American Carrier wants to take share in Mexico, but once again the carrier will be the one with the power.

So maybe $180 M USD - $250M USD is truely the fair value based on what players can pay. If that is the case I stick to my earlier post that management buying back shares are essentially bets that they get a price higher than this, and I don't know who can offer that. Obviously, management knows more than me, but I would like to hear someone break my thesis on this.
Title: Re: AIM.TO - Aimia
Post by: movys on August 27, 2019, 05:54:33 PM
If Aimia plays this correctly and does as Wabuffo has suggested (maintain strong balance sheet and demonstrate a willingness say "no" to low-ball offers and devalue points), then AM's decision on whether to renew in 2030 will be a function of what Air Canada's decision was: how much do i have to pay to get this asset vs how much would it cost me to build it from scratch? 

I have already discussed the difficulties associated with building from scratch (convincing new members to put your card "front of wallet," etc.), and Air Canada knew this all too well.  They clearly would have paid for more for Aeroplan if Aimia had been more thoughtful about preparing for this moment.

Also...Aimia doesn't need AM to buy them out in order to surface the value here.  A spin or partial IPO of PLM would work beautifully.  I have no idea where PLM would trade, but what would you pay for a rapidly growing high ROIC business with negative working capital, tax advantages, and that continues to dividend its excess "float" and income to you?  a high-single or low-double digits multiple of EBITDA is totally reasonable for a company with these secular tailwinds.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on August 27, 2019, 06:29:03 PM
If Aimia plays this correctly

Movys, I'm afraid that these bozos have no feel for capital markets.   Their CDLX sale has already cost them $12.5m CAD in opportunity cost.   Their NCIB and tender have cost them $45.5m CAD in opportunity cost (if buybacks in a liquidation made any sense at all).

All because they are impatient and panicky patsies who sell-low/buy-high.

All they had to do was cut their opex and liquidate ILS such that the PLM dividends of $20m USD per year more than covered their SG&A cash burn.  They should not have paid to make the preferreds or common current nor buy back any shares.  Then they could wait out everybody and take their time until the moment when everyone else was a panicked buyer or seller.

Oh well.

wabuffo (stuckvestor)
Title: Re: AIM.TO - Aimia
Post by: Pref User on August 28, 2019, 08:06:48 AM
On the spin-off idea I guess that comes down to what the agreement between Aeromexico and Aimia says. Would the value of the spin-off just trade around Aeromexico's offer? I understand everything you are saying about the metrics of the company, but it comes down to expectations. If it trades at $485 M USD it means that 100% Aeromexico is renewing, I understand it's all the same tactics as Air Canada but for investors it should comes down to risk-reward and at $485 M USD valuation I would be getting out the spin-off right away.

I doubt Aimia would be allowed to spin-off its interest in PLM, if it is why isn't Mittleman pounding the table to realize value on it? It is the key part of there thesis now. Then if you spin-off PLM the main business loses the thesis that Aimia will have all this capital for a good allocator to compound into the future. The only way it would work is if the spin-off takes on debt and dividends it back to Aimia which usually happens with spin-offs, so then you next have to find someone to lend more than $180 M to the PLM spin, which then the debt would essentially own the company.

Can Aimia spin the capital gain to the spin? If not then you need to factor in a capital gain's tax into the spin-off value.

I also did more research and now understand more the front of wallet argument. My bad guys. I am just trying to be a devil's advocate, it helps me with investing.
Title: Re: AIM.TO - Aimia
Post by: Tomahawk25 on August 30, 2019, 04:59:45 AM
I've been following these posts for a while (thanks for all the wise thoughts) and traded in and out of AIM a few times for a small profit.  Now I'm out, and most likely staying out.  There is of course a price that's too low and stupid to ignore, but I'm not sure we're there yet. 

I have yet to see a single, or even a reasonable pattern, of good decisions made by mgmt (or even Mittleman).  There does not appear to be a catalyst to realize value, whether liquidation, merger, disposal of ILS, etc.  Now Mittleman and the Board seem to be turning to lawyers, which means delay and more money spent, and less forward progress overall.  Meanwhile the cash burn on the operating business outside PLM continues.  This feels like a "10 foot hurdle."  So much complexity, warring sides, and money burning.  Its a red flag that there is not a clear, explicit intention by mgmt to liquidate, or at the very least dispose of the loss making operations.  I learned the hard way on the hoped for RLM liquidation (now EPIX shares) that if there is not such an explicit declaration to realize value, then it will probably be frittered away somehow.  Perhaps Aimia is now near a bottom since many other shareholders are giving up on it too, I don't know.  But to quote Cigarbutt's previous post, "This investment fits in the potentially dwindling margin of safety, absence of clear catalyst and cash burn in the meantime category."

To quote the rest of Cigarbutt's post:

"It reminds me of what Mr. Peter Cundill, the regretted and perhaps not well known enough value investor who had described his approach to these kinds of opportunities. In There's always something to do, he mentions an example of a mistake where he had bought a company with valuable assets but which had a cash-losing sub which, in the end, ate away the margin of safety.

It often pays to buy into uncertainty but there does not appear to be, for now, an obvious catalyst. So, for now, buy them cheap and something good will happen? is the mantra.

A quote from Mr. Cundill:
"“One of the dangers about net-net investing is that you buy a net-net that begins to lose money, your net-net goes down and your opportunity to be able to make a profit becomes less secure. So the trade is not necessarily to predict what the earnings are going to be but to have a clear conviction that the company isn’t going bust and that your margin of safety will remain intact over time”.

As far as the Mittleman group, their major holdings (Revlon, AMC) are doing even more poorly than the median stock these days and redemption pressure may become significant. Given the NCIB is finished, I wonder if their block of AIM shares may not even become available for an interested taker."
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on September 07, 2019, 07:17:29 AM
Things have been unusually quiet and the market has adopted the melting ice cube theme.

1-On the Cardlytics front, if it made sense to sell half of their residual stake a short while ago, I guess it even makes more sense to sell the other half now. This is a two-sided coin situation: one could argue that they (the bozos with no feel for the capital markets) should have waited and sell all in one shot now but the other side would imply that they eventually obtained more (despite the liquidity haircut) by using the two-step selling strategy. I have trouble valuing Cardlytics based on fundamentals and feel that the current upswing is related to a component of 'hype' having to do with everything intelligent that uses 'data'. IMO, given present circumstances for Aimia, they should take advantage of the recent run and complete the monetization. So far, I understand that Aimia has sold their half-stake outside of the S-3 filing framework and I wonder if Cardlytics has plans to raise equity at current prices for acquisitions? If I were Aimia, it seems that their residual core business has some complementarity with what Cardlytics is doing and would consider a reasonable offer from them for the loyalty and analytics business unit. It may even have a positive NPV, given tax-related carryforwards despite Cardlytics not becoming profitable before 2020, at least.
https://www.aimia.com/is-convenience-the-new-loyalty/

2-Aeromexico published their operational results for August and it's struggling. Some of it comes from the Boeing issue but there appears to be an overall capacity issue. It will be interesting to see, in their next quarterly result, if PLM keeps growing profitably and if PLM's inherent counter-cyclical strength comes into play. I think it will and find that the late 2018 breakage adjustment may have been an early indicator of reliance on 'engagement' vs strength of demand for seats.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on September 11, 2019, 05:26:55 AM
Cardlytics goes ahead with a seasoned offering which includes selling shareholders (but not Aimia). It's priced at 34$ and gross proceeds of 51M are expected. At the end of Q2, their net debt was -6.0M.
https://seekingalpha.com/pr/17628300-cardlytics-announces-pricing-public-offering-common-stock

The Mittleman team lines up its defense with a counterclaim and all. While exercising control or direction on 23.5% of shares, they seem to have relatively little influence on the evolving picture. I think it's time these guys come to terms over a beer.
https://finance.yahoo.com/news/mittleman-brothers-file-statement-defence-193200946.html
Title: Re: AIM.TO - Aimia
Post by: movys on September 11, 2019, 09:26:00 AM
anybody know if the complaints are public?

i don't put much stock in Mittleman's demands for CAD125M, though i'm curious about how they are arriving at that figure.  don't love the idea of Mittleman extracting compensatory damages from Aimia's coffers while the rest of us watch the share price fall...

"It is extremely disappointing that Aimia's board of directors (the "Board") has chosen to waste corporate assets through a campaign of litigation and entrenchment, rather than undertake meaningful engagement with its largest shareholder," said Chris Mittleman, Chief Investment Officer of Mittleman.

sound like Mittleman is open to a deal.

am also surprised we haven't yet heard from the Frischer group.  they are in touch with Mittleman so if Mittleman is making progress with mgmt I imagine they could keep Frischer at bay for the time being.
Title: Re: AIM.TO - Aimia
Post by: movys on September 12, 2019, 02:27:27 PM
nothing stops this train...

https://finance.yahoo.com/news/aimia-shareholders-accountability-requisition-special-151626620.html

https://finance.yahoo.com/news/aimia-acknowledges-receipt-requisition-shareholder-181600146.html
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on September 12, 2019, 06:28:16 PM
nothing stops this train...

https://finance.yahoo.com/news/aimia-shareholders-accountability-requisition-special-151626620.html

https://finance.yahoo.com/news/aimia-acknowledges-receipt-requisition-shareholder-181600146.html
The following excerpt from the 'acknowledgement' was interesting:
"Further, out of concern that the early warning reporting and takeover bid requirements under applicable securities laws, regulations and rules may not have been complied with, to the potential detriment of Aimia shareholders, Aimia sent a letter earlier this week to the members of the Frischer Group, Mittleman and certain other shareholders requesting particulars of any and all coordination activities, contacts and communications among such persons.  The company intends to take any and all appropriate action in the event any or all such persons have not fully complied with the regulatory regime." (my bold)

I guess they're 'concerned' about being ejected also and the comments lately suggest the possibility of take-over bid tactics (hostility vs defense).

Also, the Cardlytics offering may close as early as tomorrow and the underwriters are paying 32.30 per share. Let's see if Aimia can do better.
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on October 02, 2019, 04:39:44 PM
Special meeting called with a record date of Dec 23rd, and vote to be January 24th. 

There has obviously been some debate about what the NAV is here.  From my perspective, regardless if you think Mittleman's estimate is right or wrong, I think think this is a buy because regardless of what YOU think, MITTLEMAN thinks the NAV is ~100+% higher than the share price, and if you go back through his letters and interviews you can get real real comfortable with the idea that he is going to shrink that gap when they win.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on October 02, 2019, 08:39:44 PM
Special meeting called with a record date of Dec 23rd, and vote to be January 24th. 

There has obviously been some debate about what the NAV is here.  From my perspective, regardless if you think Mittleman's estimate is right or wrong, I think think this is a buy because regardless of what YOU think, MITTLEMAN thinks the NAV is ~100+% higher than the share price, and if you go back through his letters and interviews you can get real real comfortable with the idea that he is going to shrink that gap when they win.
It's not clear, in my perspective, how the Mittleman team will shrink the gap.

Thanks to James23 on the stockhouse Board, there is one more input relevant to the valuation of the PLM stake. The playbook to repatriate parts of loyalty units shared previously has been refined by Air Canada and recently, in Brazil, Multiplus has been privatized (contract due for renewal in 2024) and Smiles is pursued by their parent in a similar way (contract expires in 2032). With this playbook, the typical 8-10x EBITDA multiple has been trimmed by 30 to 60% due to the essential role played by the airline anchor partner. James23 refers to recent events related to Velocity (2nd largest loyalty program in Australia, behind Qantas loyalty). Long story short: Virgin Australia has had a loyalty unit for a long time and sold 35% of it to Hong Kong-based Affinity group for 336M (AUD) at the end of 2014. The price paid was 12x EBITDA and about 210 AUD per member. Affinity had an exit plan in mind and held convertible notes. Recently, Affinity came up with the idea that it was time to sell their stake and they used the public offering threat. Even if Virgin Australia has a relatively weak balance sheet, they announced (deal should close by the end of 2019) that they will buy back the 34.82% interest for 700M (AUD), which corresponds to a 14-15x EBITDA multiple and about 200 AUD per member. It seems that they will issue shares and get access to cheap debt capital.

This may constitute an interesting input for the PLM stake. Since 2013-4, PLM has grown similarly to Velocity (revenue, EBITDA, number of members). In the last 12 months, PLM has reported an adjusted EBITDA of 83M (USD). The disclosure for Velocity accounting is relatively muted and they seem to recognize a part of revenue (marketing) earlier than PLM, whose accounting seems to be derived from the Aeroplan playbook but, from a cash flow point of view, both entities appear comparable. A point could be made that PLM distributes a relatively large amount of its cash flows. However, Affinity has received in distributions 174.1M (AUD) since 2015.

Perhaps contractual arrangements and the shareholders' agreement are different between Aimia and Aeromexico but the Velocity story shows that the game can be played differently.
https://www.asx.com.au/asxpdf/20190916/pdf/448jw0nlpy3mzh.pdf
https://loyaltylobby.com/2019/09/16/virgin-australia-buys-back-velocity-program-for-700-million-double-the-former-sales-price/
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on October 03, 2019, 05:17:09 AM
side note, related to the Virgin Australian transaction.... in the past people have commented that AeroMexico doesn't have the balance sheet to pay a fair price.  I think that is not the right way to pay for it. 

Virgin Australia doesnt have a great balance sheet.

But that misses  the point that its not really the airline that pays for these things, it is the card issuers and banks.

Concurrent to Air Canada giving Aimia ~$500M for Aeroplan, "Toronto-Dominion Bank and Canadian Imperial Bank of Commerce paid Air Canada about $822 million, on top of an undisclosed payment from Visa Canada Corp. TD and CIBC also made pre-payments of $400 million in total to the Aeroplan -- now Air Canada's subsidiary -- to be applied to future monthly payments "in respect of Aeroplan Miles," Air Canada said."  source:https://www.bnnbloomberg.ca/aimia-completes-sale-of-aeroplan-loyalty-program-to-air-canada-repays-debt-

I assume something similar will happen with Virgin Australia, and that something similar could happen with AeroMexico

Title: Re: AIM.TO - Aimia
Post by: movys on October 10, 2019, 11:42:44 AM
I find the stock action (or lack thereof) since the announcement of the special meeting incredibly interesting.  This is THE catalyst that the skeptics and long-suffering shareholders have been waiting for -- the chance to reconstitute the board.  Why does no one care?

I'm left to conclude that either A) the market thinks mgmt will win the vote or B) closing the gap to NAV is not possible even for sophisticated and thoughtful capital allocators.

Does mgmt have an ace up their sleeve I'm not aware of?  Are they able to prevent Mittleman from voting given the ongoing litigation between them?  Are there actually shareholders out there who want mgmt to stay in place??

My guess is there are more people concerned about conclusion B, and while monetizing PLM may not be a slam dunk, there are certainly many other levers a reconstituted board can easily pull to crystallize an incremental $1.50/share in value.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on October 14, 2019, 07:26:29 AM
Virgin Australia has had a loyalty unit for a long time and sold 35% of it to Hong Kong-based Affinity group ... they will buy back the 34.82% interest for 700M (AUD), which corresponds to a 14-15x EBITDA multiple and about 200 AUD per member.

In the last 12 months, PLM has reported an adjusted EBITDA of 83M (USD)... from a cash flow point of view, both entities appear comparable.

I took a look at this transaction and dug out some financials for Velocity from Virgin Australia's annual report disclosures.  While both businesses are frequent flyer loyalty business, it looks to me that the Virgin/Velocity business generates higher free cash flow profit margins and this can be seen from its cash generation.  In addition, the current assets reflect what looks like a sizeable cash asset that I think forces one to reduce the headline price paid for the business.  Bottom line I think this transaction equates to a $650m USD value for PLM - which puts AIM's stake at around $320m USD.  That's higher than I had in my model - but probably would be a disappointment for the activists.

Here's my model - please feel free to comment, criticize.  There's some assumptions here simply because the published financials aren't detailed enough - its sensitive to one's estimate of cash flows and the cash flow numbers from both entities require a few assumptions that could be wrong.

wabuffo

(https://i.ibb.co/T0kzz3h/PLM.jpg)
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on October 14, 2019, 07:57:14 AM
not sure i would agree with using the same multiple applied to 3 year average FCF when Virgin Austrlia grew revenue 10% over 3 years and PLM grew revenue at 50% over 3 years.  In fact, i would say that is entirely inappropriate, especially given the operating leverage in the business. 

In fact, given that FCF at Virgin Austrlia has declined by 17% over the last 3 years, one could argue that the 9.4x multiple is low, and that since FCF at PLM has grown 450% over the last 3 years PLM deserves a premium.  If not a premium at the very least the 9.4x multiple should not be applied to a 3 year average that has inflected so massively.  I would note that 9.4x 2018 FCF implies a value north of $1B. Now maybe FCF comes down a bit given the economic situation at Mexico, but even if you ding them for that, i think your model is way off.  Remember, the numbers by themselves mean nothing.  you have to think about what they mean, and it should be obvious that 50% top line growth and 450% FCF growth is better than 10% top line growth and shrinking FCF.
Title: Re: AIM.TO - Aimia
Post by: movys on October 14, 2019, 08:13:03 AM
Virgin Australia has had a loyalty unit for a long time and sold 35% of it to Hong Kong-based Affinity group ... they will buy back the 34.82% interest for 700M (AUD), which corresponds to a 14-15x EBITDA multiple and about 200 AUD per member.

In the last 12 months, PLM has reported an adjusted EBITDA of 83M (USD)... from a cash flow point of view, both entities appear comparable.

I took a look at this transaction and dug out some financials for Velocity from Virgin Australia's annual report disclosures.  While both businesses are frequent flyer loyalty business, it looks to me that the Virgin/Velocity business generates higher free cash flow profit margins and this can be seen from its cash generation.  In addition, the current assets reflect what looks like a sizeable cash asset that I think forces one to reduce the headline price paid for the business.  Bottom line I think this transaction equates to a $650m USD value for PLM - which puts AIM's stake at around $320m USD.  That's higher than I had in my model - but probably would be a disappointment for the activists.

Here's my model - please feel free to comment, criticize.  There's some assumptions here simply because the published financials aren't detailed enough - its sensitive to one's estimate of cash flows and the cash flow numbers from both entities require a few assumptions that could be wrong.

wabuffo

(https://i.ibb.co/T0kzz3h/PLM.jpg)

Value depends on what happens in the future, not the past, and when ascribing multiples investors are forward-looking.  Using a 3-year average FCF number only makes sense if you think it is representative of the normalized FCF profile of the business going forward.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on October 14, 2019, 08:29:52 AM
Good comments - I would take revenue numbers (and growth rates) with a grain of salt.   PLM in particular changed its breakage assumptions in 2018 which affected reported revenue and deferred revenue.  I'm not sure I got the cash revenues right for 2018 - and thus, may have overestimated cash flow for that year.  In fact, I'm pretty sure I overestimated free cash flow.  So sure - you could put a higher multiple, but you may have to reduce the estimate of free cash flow on which you are slapping that multiple.

In the end, I have no idea if PLM is worth $300m, $500m - but I'm pretty sure its not worth $1B which Mittleman and other activists have thrown around.  I think investors should always try to do their own homework in order to make comparison benchmarks more apples-to-apples.
 
wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on October 15, 2019, 05:04:50 AM
...
In the end, I have no idea if PLM is worth $300m, $500m - but I'm pretty sure its not worth $1B which Mittleman and other activists have thrown around.  I think investors should always try to do their own homework in order to make comparison benchmarks more apples-to-apples.
 
wabuffo
When submitting #535 above, I had prepared a similar table but was too lazy to include it. Your last posts help to learn what a good contribution really is.
The goal remains to kill the thesis and the big issues for PLM are contractual and related to AeroMexico's negotiating attitude to the outcome but, from a valuation standpoint, up tp Q2 2019 at least, PLM has attributes that are comparable or better than Velocity.

Velocity has grown but it is the #2 airline loyalty in Australia, behind Qantas. Velocity has been catching up (number of members) and profitability margins are slightly better but Velocity's revenue per member (engagement) remains way less. Club Premier is #1 with no close competitor (as far as I can tell and assuming Delta does not transfer their loyalty expertise there) in a growing market.

The FCF estimates are difficult to validate given disclosures and you may want to incorporate earlier years. In the last 5 to 6 years, growth in gross billings, growth in members and cashflow margins have been comparable. Around 2014-5, Velocity recruited BP as a retailer and this had a massive effect on accumulation and redemption, explaining the bump in revenues and EBIT and the relative plateau reached lately.

On the comment about Velocity being cash-rich, disclosures are limited and PLM has a different current and non-current asset profile but Velocity seems to carry more float versus redemption liabilities. However, I think that your calculations suffer from a certain amount of double counting because their non-current liabilities corresponds to debt (unlike PLM). In 2015, Velocity entered into a syndicated facility agreement of 225.0M, with a 5.3% rate per annum. This then became labeled as a bank loan and is due for renewal in 2020. You may subtract the 225M from the excess cash that you describe in order to come up with a sales multiple versus enterprise value.

Virgin Australia offered the minority interest because they needed the cash and now have to go to the junk bond market in order to buy it back at a much higher price. There is a price to pay to share the fun. It would be nice if somehow AeroMexico would be forced to pay its share. It would be ironic if AeroMexico would need to go to the debt market in order to buy the rest of PLM (and paying a fair price) after having reported that it's a poor business with governance issues. But markets have short memories.
 
Title: Re: AIM.TO - Aimia
Post by: wabuffo on October 15, 2019, 05:59:24 AM
However, I think that your calculations suffer from a certain amount of double counting because their non-current liabilities corresponds to debt (unlike PLM).

Hey CB - thanks for the critique.   I did not include the non-current liabilities and missed the debt.   But I also did not include what appears to be a note receivable asset of $150m that came out of cash in 2018.  So overall not quite a wash - perhaps $75m deduction to get to net cash.

As to the differing growth profiles, those are fair points.  Without detailed financials - we're left to guess at a lot of the key variables for valuation.

Q3 earnings call should be interesting.  I'm sure they won't say anything about the coming board meeting - but you never know.  I see Mittleman has a press release out this morning containing their statement about the upcoming shareholder vote.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Pref User on October 21, 2019, 12:42:42 PM
Haven't been on here in a while but Wabuffo there are two qualitative factors that should also be considered in the valuation. First Virgin Australia is made up of 4-5 major equity owners who own 90% of the company. I don't know if each one wants to take over the company or if they are all looking to sell so they can all get a liquidity event and exit. If they are looking to sell it might have been easier for them to remove one of the new cooks from the kitchen (Affinity), as whoever would buy out the entire company would then have to deal with Affinity. Affinity would have known this and used this as leverage for a higher price. Second, looking through the executive equity compensation for the loyalty unit it was all tied to what price Affinity was bought out at, the old Charlie Munger " Show me the incentives, I'll show you the outcome". So the people who were probably in charge negotiating the deal were not incentivized to get it at a steal.

On the financial side, I didn't do as deep as a dive as you did. I do not know if your FCF number includes the non-controlling interest payment or not, just going to say it doesn't include the payout. If that is the case then once the convertible bond went to equity I would assume they get 35% of the FCF so 48.3M. The decision may have simply come down to capital structure arbitrage if we can get debt even if its expensive will our FCF be better off. So quick math using the tax rate of 16.2% in 2019 I quickly calculate that as long as the debt does not cost over 8.23% then the Airline is better off.(Just an update checked and the longest term bond for Virgina Austalia has a YTM of 6.55%, using that number 2019 FCF would be 11% higher using the debt then giving equity to Affinity)  S&P even came out and said the new debt would not affect the credit rating and that the business could handle it. I don't know if it is better off in the long run, and who knows if management is thinking that far ahead.

We don't know how PLM's management is compensated or at least I haven't found anything yet, and Aeromexico doesn't have the too many cooks in the kitchen issue. So I personally find it really hard to make an apple to apple comparison. As we have already seen Aeromexico has made low ball offers in the past, so they are clearly trying to get the asset at the right price.

I was reminded this week of a great quote, investors need to be able to clarify the difference between "what should happen and what will happen".
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on October 22, 2019, 04:48:40 PM
Here are some soft inputs to perhaps marginally help differentiate "what should happen and what will happen".

-Aeromexico Q3 results are out. The absence of comments about PLM is interesting in comparison to the unveiled threat released in Q2. Also, from limited disclosure, the air traffic liability increase (with its positive effect on CFO) which includes the loyalty component on top of the seasonal accrual effect, seems to be strong. It will be interesting to see how PLM has performed in Q3.
https://aeromexico.com/cms/sites/default/files/Aeromexico_3Q19.pdf

-Earlier in the year, Aimia defined its new strategy with a certain sense of urgency in a loyalty world apparently full of accretive opportunities. As of now, nothing has panned out and I see this as a positive. We'll now more next Monday when they report.

-Insider activity has been very quiet lately.

-Cardlytics just released a 13G form which reveals that Aimia's stake is down from 1,478M shares (6.47%) announced by Aimia and reported by Cardlytics at the end of August, to 1,098M (4.52%). This seems to represent the last SEC notification (below 5%). It appears that Aimia can gradually dispose of its remaining stake without much noise.
https://www.sec.gov/Archives/edgar/data/1666071/000119312519271582/d823323dsc13g.htm

-Also, Club Premier does not seem to behave like a runoff entity as it is recruiting new partners:
https://www.businesswire.com/news/home/20191021005514/en/Citi-Adds-Club-Premier-Aeromexico-Vast-Suite

It's all soft evidence but, at least, IMO, it's pointing in the right direction.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on October 28, 2019, 03:08:20 PM
https://corp.aimia.com/news/ (https://corp.aimia.com/news/)

Q3 "Results" are out. 

They sold 100% of their Cardlytics stake while they execute their "strategic plan" on which they are making "excellent progress" by continuing to light money on fire.   8)

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on October 29, 2019, 04:46:39 AM
the fact that they didn't announce a major acquisition - and lets hope they don't on the call in 45 minutes - is a major positive.  that is the biggest risk here... that the existing board does something stupid before the meeting on January 24th.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on November 13, 2019, 06:18:51 AM
https://corp.aimia.com/news/ (https://corp.aimia.com/news/)

Q3 "Results" are out. 

They sold 100% of their Cardlytics stake while they execute their "strategic plan" on which they are making "excellent progress" by continuing to light money on fire.   8)

wabuffo

Some pre post-mortem work on the Cardlytics stake here.
1-The bozo take: the selling of shares put pressure on the price and now that CDLX report results that the Market will really like, it will be painful to calculate the value lost through ill-timed sales.
2-An alternative take: despite high growth that looks promising, selling the stake in chunks seems like a reasonable move, under the circumstances.
Note: I don't really understand the economics behind what CDLX is selling but its capital structure compared to its peers is very unusual: no debt and a large amount of cash sitting on its books.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on November 13, 2019, 11:05:37 AM
https://finance.yahoo.com/quote/CDLX?p=CDLX&.tsrc=fin-srch (https://finance.yahoo.com/quote/CDLX?p=CDLX&.tsrc=fin-srch)

CB - I'd go with the bozo take.  LOL!  CDLX +36.5% today.   Sell low and buy high.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Pref User on November 14, 2019, 10:28:11 AM
I think you have to consider that Cardlytics was sold to raise cash because of a chain of events by management AND Mittleman. Think about the $80M left on the table as the yield on doing the tender offer at $4.50. Had management who knew they had a cash-burning business decided to keep the cash instead of trying to close a discount gap that is not concrete and all based on what PLM is sold for, Cardltyics is probably not sold then to shore up cash for the balance. So if you look back the real dumb move in hindsight was not selling Cardlytics early it was the bought deal that added no value to shareholders. In fact, the discount gap has gotten wider. Again, I know it is hindsight but using the current share price and adding the money left on the table with Cardlytics the bought deal has a negative yield of -68.75% (110/162).

What we should all be concerned with are managements and Mittleman's capital allocation skills. 
Title: Re: AIM.TO - Aimia
Post by: wabuffo on November 14, 2019, 11:27:55 AM
Agreed - mgmt is confused and erratic (and driving a clown car).

they rushed to:
- make the preferreds current,
- so that they can do a tender at above the market prices, which
- led to a second repurchase effort after the first failed to produce the desired effect,
- which left them short of cash while they continue to incinerate more....

this made them forced sellers of CDLX.  I have no idea of how to value CDLX (and apparently neither does AIM mgmt) - but I can't help but think that this was furniture-burning

My worry is that this pattern repeats with PLM.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: movys on November 14, 2019, 12:13:17 PM
Agreed - mgmt is confused and erratic (and driving a clown car).

they rushed to:
- make the preferreds current,
- so that they can do a tender at above the market prices, which
- led to a second repurchase effort after the first failed to produce the desired effect,
- which left them short of cash while they continue to incinerate more....

this made them forced sellers of CDLX.  I have no idea of how to value CDLX (and apparently neither does AIM mgmt) - but I can't help but think that this was furniture-burning

My worry is that this pattern repeats with PLM.

wabuffo

That last worry would be of more concern if you thought mgmt would survive the vote in a couple months.  I don't see how they can.  Extracting value thoughtfully from PLM requires some care and may not be a layup, but winding down money losing businesses is a no-brainer and will be done in short order after the vote. 
Title: Re: AIM.TO - Aimia
Post by: Pref User on November 15, 2019, 09:31:12 AM
I don't know if winding down ILS makes sense now. I know it is only one-quarter of positive results, but next year a huge chunk of IT costs are coming out of the business and I actually have ILS slightly positive cash, not significant but still positive cash. I wouldn't bet against the management on getting ILS positive now after the current execution, especially after reexamining their compensation. Rabe only gets paid if the sum of EBITDA is positive over his three years from ILS, and we all know he wants to get paid, so I wouldn't rule it out.

I know ILS has been losing money for years, but management didn't have any incentive in the past to improve it because Aeroplan was doing well. But if ILS is slightly positive cash flow why get rid of it? It helps eat up costs and without ILS Aimia is still negative cash flow because of the preferred shares and the tax Aimia has to pay for paying preferred shares when it is not making taxable income, PLM's dividend is covering that expense this year but PLM gave a one-time large payout. Unless that one-time payout becomes regular a slightly positive ILS would be good for Aimia.

As for management staying in power, the one thing I would say to look out for is the PH&N fund striking a deal with Aimia that pays in full the preferred shares in common stock with the condition that RH&N votes for management. PH&N gets the much-needed liquidity and a boost to its returns for this year, which have been a disaster and given away 90% of their outperformance since inception. Management could justify it to shareholders because it removes the cash burn from preferred shares and isn't a significant hit to the NAV.  Throw in Mittleman's decreased stake and I get that management carries the day at the new vote by a very slim margin. Not sure it will happen but something to consider. 
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on November 15, 2019, 11:43:07 AM
...
As for management staying in power, the one thing I would say to look out for is the PH&N fund striking a deal with Aimia that pays in full the preferred shares in common stock with the condition that RH&N votes for management. PH&N gets the much-needed liquidity and a boost to its returns for this year, which have been a disaster and given away 90% of their outperformance since inception. Management could justify it to shareholders because it removes the cash burn from preferred shares and isn't a significant hit to the NAV.  Throw in Mittleman's decreased stake and I get that management carries the day at the new vote by a very slim margin. Not sure it will happen but something to consider.
I'm getting more and more confused and wonder who may be the sharpest tool in the bozo shed.
Isn't it ironic that the capital that was labeled as 'stranded' may become risk capital, by invitation only?
I would say the now embedded and implicit conversion value is net positive and it may be interesting to see how 'fair value' is determined and the impact on NAV.
It looks like fair value, in this specific scenario, would be much lower than during buyback plans, not even considering where Mittleman thinks it is.
Usually dilution is not well received from existing shareholders but the issue may become institutional.
I've followed a lot of recaps but this kind of twist would be a first: some kind of a white knight status tagged with a premium, in a company loaded with cash on the asset side and no 'real' debt. The intuitive value of preferreds may evolve, at least the perception of it. The truncated capital structure may have something to do with it.

In 2009, the Treasury came up with a plan to attract private investors to invest in the banks' toxic assets. It was discovered that a significant kicker had to be included with the deal and the plan fell apart because politicians were worried that the process would be called a bail-out. So they did something else. LOL. A bail-out is a bail-out and it does not matter if people figure out after that it wasn't.

In 1588, it was felt the Invincible Spanish Armada was just too strong but the best way to fight for the British was to wait for, weather obliging, an opportunity and eventually this meant not much fighting at all. Liquidation remains the best option but, short of that, the next few weeks could be (really) entertaining.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on November 18, 2019, 06:12:56 AM
Aimia capitulates - BOD will resign by Feb, 2020 and activist lawsuits will be withdrawn.  I guess Rabe keeps his job - its unclear from the press release.

In addition, more cowbell!
https://www.newswire.ca/news-releases/aimia-announces-concurrent-substantial-issuer-bids-for-common-and-preferred-shares-for-aggregate-purchase-price-of-up-to-125-million-817970318.html (https://www.newswire.ca/news-releases/aimia-announces-concurrent-substantial-issuer-bids-for-common-and-preferred-shares-for-aggregate-purchase-price-of-up-to-125-million-817970318.html)

The tender for $62.5m of preferreds is interesting. Weird tender price - at or slightly below market.  Both sides were talking to Mamdani in order to get his support of their respective position.  Looks like he supported the activists in return for the preferred buyback.

I'm just confused as ever with this clown show.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: movys on November 18, 2019, 08:43:56 AM
Aimia capitulates - BOD will resign by Feb, 2020 and activist lawsuits will be withdrawn.  I guess Rabe keeps his job - its unclear from the press release.

In addition, more cowbell!
https://www.newswire.ca/news-releases/aimia-announces-concurrent-substantial-issuer-bids-for-common-and-preferred-shares-for-aggregate-purchase-price-of-up-to-125-million-817970318.html (https://www.newswire.ca/news-releases/aimia-announces-concurrent-substantial-issuer-bids-for-common-and-preferred-shares-for-aggregate-purchase-price-of-up-to-125-million-817970318.html)

The tender for $62.5m of preferreds is interesting. Weird tender price - at or slightly below market.  Both sides were talking to Mamdani in order to get his support of their respective position.  Looks like he supported the activists in return for the preferred buyback.

I'm just confused as ever with this clown show.

wabuffo

Current mgmt will remain in their roles until the board is reconstituted in Feb.  After that, the board is free to replace any officers it wishes to replace.  There will be no golden parachutes or generous severance agreements put in place in the interim.  Further, mgmt may not consummate any material transactions without the approval of Mittleman.

It is also no accident that the expiration for the Preferred SIB is different from that of the Common SIB.  If the preferred SIB is not fully subscribed, you can expect Aimia to increase the size of the common SIB.  This is a total victory for the activists.  Mittleman will take control of the company in 90 days, return some capital to shareholders at a modest premium, and put an end to the cash incineration.

Previously, there was substantial uncertainty the gap to NAV would close, coupled with the fact that NAV was slowly shrinking.  Now, there is substantial certainty the gap to NAV will close, and NAV is likely to increase.  Shares should be materially higher today, though I'm not surprised by the muted reaction, given the large retail component and the large number of shareholders just involved for the special meeting catalyst.
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on November 18, 2019, 01:11:08 PM
Is there a risk mittleman converts this into a vehicle for his own investing? If he does that I would expect a relatively significant discount to NAV...
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on November 18, 2019, 02:41:12 PM
i wouldn't be surprised if they owned some common stocks, but in order to take advantage of the tax assets they're going to want some operating companies i would think... but i guess we'll see
Title: Re: AIM.TO - Aimia
Post by: wabuffo on November 18, 2019, 03:46:30 PM
It is also no accident that the expiration for the Preferred SIB is different from that of the Common SIB. 

It's also probably no accident that the SIB is concluded right at year-end at a price ($4.25 per share) that we haven't seen for much of 2019.  The fact that the activists get a favorable year-end mark is just a fortuitous accident.

This is a total victory for the activists.

We'll see - for now it appears the hounds have caught the car that they've been chasing.  I'm surprised at the buyback - they keep buying high (AIM buybacks) and selling low (CDLX).  I continue to be agnostic but as a hodler, I do wish the activists luck.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on November 18, 2019, 03:53:55 PM
Is there a risk mittleman converts this into a vehicle for his own investing? If he does that I would expect a relatively significant discount to NAV...
The thesis here needs to take into account that Aimia would morph into an entity that would be considered a perpetual SPAC with a hope that a smaller discount to NAV could be achieved.
Title: Re: AIM.TO - Aimia
Post by: Pref User on November 18, 2019, 03:56:49 PM
Pulling out a calendar there is not much of a difference in the days for the SIB, the 27th is a friday and the 30th is a monday. So the SIB gets 2 extra days, how much more do you think is going to actually be offered in those days even if they don't use up all of the preferred share SIB. 

I think PH&N fund will fill the preferred share SIB no problem. They've been searching for a liquidity event for a year now and they finally got it, the SIB price is above their cost, throw in the dividend and they didn't do to bad for a little over a one year hold on some of their money. 
Title: Re: AIM.TO - Aimia
Post by: wabuffo on November 18, 2019, 04:05:57 PM
would be considered a perpetual SPAC

How does that not become a PFIC in the IRS's eyes?

I think PH&N fund will fill the preferred share SIB no problem.

I agree - this preferred SIB was designed by and for Mamdani. 

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Pref User on November 18, 2019, 04:46:00 PM
Could they delist and move Aimia to the US to avoid PFIC?

And would that mean keeping ILS if its making a little money is in Mittleman's best interest to avoid being a PFIC?
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on November 19, 2019, 05:29:48 AM
"It's also probably no accident that the SIB is concluded right at year-end at a price ($4.25 per share) that we haven't seen for much of 2019.  The fact that the activists get a favorable year-end mark is just a fortuitous accident."

If they really wanted a year end mark they would have said it expired on the 31st, not the 30th... the market is open on the 31st, so shares will not end the year on the SIB price.

As for PFIC, tied to what i said earlier about maybe owning some common stocks, they need operating income to avoid PFIC status, so its not like they'll just buy all common stocks.
Title: Re: AIM.TO - Aimia
Post by: Pref User on November 19, 2019, 06:52:32 AM
So does that mean the for the PFIC they'll need to keep ILS? Just wondering because PLM's dividend as their only income from my understanding would make them a PFIC.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on November 19, 2019, 07:21:49 AM
Aimia submitted some sum-of-the-parts valuation work from Alexander Capital as part of the offering memorandum.  I'm attaching the pdf to this post and encourage all of the AIMIA bulls to cop a squint at it.  Its not the $8-$10 valuation that everyone is hoping for.   In addition, there are several parts where I think Alexander Capital took the most optimistic scenario vs what I would do.  So with that as an intro here's my sum-of-the-parts using the Alexander Capital work.

I made two minor changes:
1) Alexander Capital used mgmt's estimate of long-term SG&A = $13m and slapped a multiple on it.  AIMIA is currently running at $25m.  I don't have confidence in mgmt's forecast - so I'll use $20m (and use the same multiples).
2) The preferreds were valued at market.  But in a liquidation, I think its unlikely that AIMIA will be able to continue to buy out at market.  We'll get more info after the preferred SIB (though I still believe its a liquidity event for Mamdani to reduce his stake).  I'm going to use par value.
3) Other than that, I will accept Alexander Capital's valuation estimates for PLM, Big Loyalty and ILS (though I suspect folks here will be disappointed in the PLM valuation).

Bottom line - mid-point of valuation estimate is around $4.40 per share (not much above the SIB price).

As always, criticisms and critiques welcome. 

wabuffo

(https://i.postimg.cc/cLMMX1Hh/AIMIAvalue.jpg)
Title: Re: AIM.TO - Aimia
Post by: Pref User on November 19, 2019, 08:25:24 AM
I agree with your adjustments. I would add an additional one for ILS. Reading the report there is a lot of "IF" and execution that needs to happen over the next 3 years which might not happen under new management. If Mittleman comes in and shuts down ILS (which was discussed in the wrongful dismissal lawsuit) then there is a significant swing in value. Shutting down ILS would require severance and paying off liabilities related to ILS, quick estimate that could be $50M-$70M, which translates to a $75M-$100M swing in value or $0.69/share - $092/share. Taking the valuation range down too $3.22 - $4.00, making the new midpoint $3.61.


Also isn't this report a huge liability for Aimia now with regards to PLM? An independent valuation expert that Aimia signed off on to do their SIB came back with a valuation that is below Mittlemans. Aeromexico could easily use this document against Aimia when negotiating any future buyout. 
Title: Re: AIM.TO - Aimia
Post by: wabuffo on November 19, 2019, 09:52:56 AM
...isn't this report a huge liability for Aimia now with regards to PLM?An independent valuation expert that Aimia signed off on to do their SIB came back with a valuation that is below Mittlemans.

I mean...because it's Mittleman?  Their credibility left town a long time ago. 

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Dr. Aybolit on November 27, 2019, 02:14:56 PM
The Alexander Capital report appears to make a glaring mistake with regard to its valuation of PLM, and thus Aimia. 

On the top of page 13, it states: "Alexander Capital considered FRL to be a financial obligation for the purposes of deriving equity value from enterprise value."

I cannot find any precedent for doing so.  The FRL recycles and grows as long as the business is a going concern.  It is a negative working capital benefit which is never charged against enterprise value as far as I can tell.  When airlines buy other airlines they don't add the FRL of the acquired entity's loyalty program to their consideration of enterprise value.

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 (at the 1.3167 FX rate used in the report) that needs to be added back to their valuation of PLM, which is C$2.43 per Aimia share on 108.544M shares.  That is a huge difference.  Add C$2.43 to Alexander Capital's C$5.10 to C$6.25 outcome range and it becomes C$7.53 to C$8.68, all else being kept the same.

they also applied a 10% discount on PLM due lack of liquidity and lack of total control.  But Aimia has joint control, and joint control is actually worth some portion of a control premium to the buyer who would like full control, and the ability to do with the substantial FCF anything it wants.  So even if no control premium is added, but just removing the erroneous discount, that is further upside to the range of values they produced.

i understand being conservative, which is fine, but not at the cost of being incorrect.  PLM has a 30%+ EBITDA margin and generates unlevered FCF of US$60M per year that has grown at a double digit rate for nearly 10 years and is seemingly recession-proof. 

in late 1997 Warren Buffett paid $585M for International Dairy Queen (INDQA), 9.75x EBITDA of $60M (15% EBITDA margin), and 16.5x $35M in FCF, when the UST 10-yr was over 6%.

obviously apples and oranges, to say the least, but then again, this is the corner of Berkshire and Fairfax...

Happy Thanksgiving to all...
Title: Re: AIM.TO - Aimia
Post by: wabuffo on November 27, 2019, 02:58:23 PM
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
Title: Re: AIM.TO - Aimia
Post by: Dr. Aybolit on November 27, 2019, 05:42:27 PM
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. 
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on November 27, 2019, 08:22:25 PM
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 (!).
-----
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%.
Title: Re: AIM.TO - Aimia
Post by: Dr. Aybolit on November 28, 2019, 10:52:10 AM
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
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on November 28, 2019, 08:44:09 PM
...
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?
Title: Re: AIM.TO - Aimia
Post by: Pref User on December 02, 2019, 10:59:25 AM
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. 
Title: Re: AIM.TO - Aimia
Post by: Dr. Aybolit on December 02, 2019, 10:26:50 PM
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.
Title: Re: AIM.TO - Aimia
Post by: Dr. Aybolit on December 02, 2019, 11:22:06 PM
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.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on December 09, 2019, 07:36:02 AM
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
Title: Re: AIM.TO - Aimia
Post by: Dr. Aybolit on December 13, 2019, 10:22:29 PM
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. 




 
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on December 14, 2019, 05:11:08 AM
^In terms of fairness for PLM, it may boil down to not what Aimia deserves but to what they can negotiate. The PLM template looks more and more like the Gol story. I just reviewed Aimia's 2.0 plan disclosed at the end of March of this year and 2 conclusions stand out:

1-PLM's then CEO appears on page 24 and the planned collaboration turned into a unidirectional dismissal 6 weeks later.
https://corp.aimia.com/wp-content/uploads/2019/03/Aimia_Q4-2018-Highlights-FINAL.pdf
Watching the evolution of key parameters and using the 'improved' Gol offer (number of members, gross billings, 'adjusted' EBITDA') as a template, I think Aimia should settle for 220-240M USD ASAP because the value (and uncertainty about the value) in the joint venture is likely to go down over time. It's not clear why Aeromexico appears to be so well set in the driver's seat but would assume it has to do with Mr. Duchesne's style as previous Aimia's CEO, who understood a lot about loyalty management but who did not have the same strategic and opportunistic vision as the likes of Mr. Rovinescu, so the initial foundational PLM contracts may have left the 48.9% partner vulnerable in relation with value protection over time. As far as the EBITDA multiple that AC paid for the underlying Aeroplan cashflows (enterprise value point of view), I come to a multiple of +/- 6 since IMO, one has to take into account the redemption liabilities. AC took the short term liabilities without the 'working capital float' and assumed about 2B of longer-term liabilities without any long-term float. The liabilities needed to be deeply discounted (time value of money, going concern replenishment and very high profit margins upon redemption) but not to zero. Apart from paying at the low end of the spectrum, the ingenuity of the transaction was mostly linked to the fact that Mr. Rovinescu was able to force the financial partners to pay (through essentially a perpetual zero interest loan) for a large part of the enterprise value acquired. The Mittleman people seem to think that the PLM's value is much higher than the 220-240M price tag described above and would submit that the unrealistic expectations may be forced to meet reality at some point. But the Mittleman people have been buying shares in the open market in the last few days.

2-The game plan for Aimia has radically changed since last March and the outcome is highly dependent on the actions of the significant partner. I like the fact that the legacy loyalty unit will be wound down or sold. I will try to reassess the Mittleman people's long-term track record. The margin of safety continues to go down. I think I understand their style and why their performance has been relatively impacted in the last few years. But it's the future that counts.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on December 14, 2019, 09:57:17 AM
I will try to reassess the Mittleman people's long-term track record.

I've pretty much written off Mittleman.  His recent track record calls into question his investing acumen.  He signed off on Rabe without apparently getting aligned on strategy, etc...  If he has an A-game, he hasn't been bringing it to AIM.TO from what I can see.

Frischer is a complete wildcard to me and much more the important X-factor from now on.  Despite his much smaller stake, he will have 3 board seats to Mittleman's 1.  Plus he gets high marks for taking on the AIM.TO Board of Directors and dismantling them (something Mittleman failed to do). 

Having said all that, the degrees of freedom for an activist have been sharply reduced over the last year and a half.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Dr. Aybolit on December 14, 2019, 09:08:50 PM
Cigarbutt - I disagree that the plight of the Smiles shareholders vs. GOL is more likely the path forward for Aimia (PLM) vs. Aeromexico than the Advent (Lifemiles) vs. Avianca template, because unlike the Smiles shareholders who merely provided money when the parent needed it, in the latter two examples, both Advent (Lifemiles) and Aimia (PLM) were fundamental to the success of those businesses, and protected by shareholder agreements that I don't believe the Smiles shareholders have.  For example, the Alexander Capital report glosses over a "put option" in the Shareholders Agreement, but doesn't clarify its terms.  I can't find details on that anywhere on the interweb but I imagine its a benefit for negotiating that Smiles shareholders lack.

I also disagree with your assertion that the value will decline in the future so Aimia should seek a sale "ASAP" at a distressed valuation (you posited US$230 mil. at the mid-point (even lower than the US$330 mil. that Alexander Capital claimed) and an EV of US$469 mil., or 5.2x US$90 mil. in EBITDA and 7.8x the US$60 mil. in unlevered FCF), as PLM has grown membership from 2.7 mil. at inception of the JV in late 2010 to 6.6 mil. as of Q3 2019, a 10.4% CAGR, with gross billings, EBITDA, and FCF growing faster.  The projections in the Alexander Capital report show all key metrics more than doubling over the next 10 years, so call it 7.2% growth going forward.  So unless one believes that Aeromexico would actually blow up Club Premier after 2030 rather than pay a fair price, i think time is on Aimia's side.  Also, selling that 49% stake in PLM would almost certainly make Aimia a PFIC, so I don't think they can do it, at all, at least until they have acquired enough in the way of other businesses to avoid that designation which would be toxic to their now largely U.S. investor base.  That's why I think that rather than attempting to sell PLM they should pursue a leveraged recap to payout a large dividend like LifeMiles did, to the great benefit of both Advent and Avianca.

in this Aimia presentation from 2012 (see link below) on their success with PLM as of late 2012, both sides highlight how important Aimia was to the growth achieved in the first 2 years of their JV and they publicly claimed that fair value of PLM was US$518 mil. for the EV then, against US$115 mil. in gross billings, and based on 15% discount to that mutually agreed upon valuation Aimia paid US$88 mil. for an additional 20% stake (EV US$440 mil.)  TTM gross billings as of 9/30/19 were US$256 mil., which is 2.2x the US$115 mil. cited in 2012.  At 2.2x the 2012 agreed-upon valuation of US$518 mil. that EV would be US$1.14 bil., with Aimia's 49% stake worth US$558 mil.

http://docplayer.net/35123595-Taking-club-premier-how-aimia-helped-aeromexico-optimize-its-loyalty-program.html

some quotes from that presentation here below:

"Perhaps most importantly to the new company's shareholders, Club Premier has delivered US $115 million in gross billings, with more than 30 percent adjusted EBITDA margin. The joint venture has been so successful that, in October 2012, Aimia and Aeromexico reached an agreement in principle of an additional 20 percent equity participation in PLM by Aimia. PLM s fair value has been established at US $518 million, and Aimia will pay US $88 million, which includes a discount agreed to at the time of Aimia s initial September 2010 investment. The transaction is subject to customary closing conditions, including the execution of definitive agreements and Mexican regulatory approvals, and is expected to close before the end of After closing, the equity participation of Aimia and Grupo Aeromexico in PLM will approximate 49 percent and 51 percent, respectively."

"Our partnership with Aimia has been a great success. It is based on trust, collaboration, and mutual respect. Together, we have been able to structure fair agreements, select a top-notch management team, and design a winning business model which delivers great value to Club Premier s members, business partners, and shareholders. In fact, Club Premier's value has just about tripled in just two years. The numbers speak for themselves!" - Ricardo Sánchez Baker, CFO, Grupo Aeromexico

The numbers do speak for themselves, Ricardo.  I expect that the new board at Aimia, with an ownership mentality long lacking over there, will be more keen to make sure that someone is listening.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on December 15, 2019, 06:41:50 AM
^You make good points but it takes two to tango. And it's still unclear if there is somebody on Aimia's side who knows how to dance.

It appears (this is discovery in the making) that the substance of the PLM contractual agreement between Aeromexico and Aimia favors the former. You refer to the put option provision but that remains to be defined. In essence and even if not explicitly stated in their contract, Aeromexico's side of the bargain in the assorted relationship contains an implicit call option, in the sense that they can opportunistically decide (somehow) to make an offer to complete a buyout when (in the next ten years) they feel this is most appropriate to do so (and noting that their negotiating leverage will tend to increase over time with the looming deadline).

Let's say I own a hospital (let's make this a US example since general economic conditions have a significant cyclical effect on healthcare venues' profitability in the US) and we form a joint partnership in an adjacent medical clinic whereby you own 48.9% of the business, you run the clinic operations through a contract running for 10 years but I potentially can use the threat to send patients elsewhere and decide to try to force you out in the next 10 years (whenever I think it is best to do so). I would say that the quality (and value) of the partnership would be highly conditional on the quality of bond underpinning the partnership.

In simple terms, my assessment of the quality of the PLM partnership has been going down and it seems that the contractual agreement offers relatively limited protection for that kind of quality.

From a 2018 Aeromexico press release:
"Given the long-term intention of Aeromexico to take full control of its loyalty program, Aeromexico does not consider an IPO of PLM as an acceptable option. For this reason it is Aeromexico's view that the best long term solution for all stakeholders is for Aeromexico to acquire the equity stake currently held by Aimia." 
Title: Re: AIM.TO - Aimia
Post by: Dr. Aybolit on December 15, 2019, 11:32:21 PM
regarding the new board's dancing skills, yes, we don't know how well they will perform, but it is an obvious improvement in odds of success to have a board almost entirely compromised of non-shareholders with an awful track record replaced by a board of major shareholders with a decent long-term track record, and their appointees, however uncertain their capabilities.  so I see the corporate governance aspect as becoming much improved, meaning lower risk, and thus an increase to margin of safety because those who seemed to be pursing a fire sale are leaving and those who clearly believe in much higher values (as their stock holdings and recent purchases and lack of sales into the SIBs confirm) are taking the reins. 

regarding your inference that the shareholders agreement of PLM somehow unduly favors Aeromexico over Aimia, given that the document does not appear to be in the public domain, I presume that neither one of us has seen it, so how can such an assessment be made?  The put option that I read about from the Alexander Capital report i think can be reasonably inferred to be, whatever its terms, some advantage over the lack thereof that the Smiles shareholders face vs. GOL.  But I cannot see the basis from which you draw your conclusion that Aeromexico has an advantage over Aimia based on a document that no one (except for insiders) can see.

and in contrast to your analogy of a medical clinic handling contract work for a nearby hospital, there is nothing else like Club Premier in Mexico, to my knowledge, and to attempt to undermine it or begin building an alternative before the 2030 contract ends would presumably be a breach of the contract, with major damages owed to PLM, and a potential restraining order impairing the attempted work around.  more importantly, it would likely damage Aeromexico's business, and expose their bank partners to liability as well, all to coerce a proven good partner out of a contract they could otherwise simply buy for a very nice free cash flow yield at a fair valuation?  I can't see how Delta would allow that needless legal risk and customer disruption and cost to rebuild in order to attempt to squeeze out a couple hundred million in undue gains.

Aeromexico can posture in press releases, but unless its willing to pay a fair price or risk blowing up the business, i assume that the quality of the partnership is contractually protected until 2030.  if this year was 2027 and Aeromexico had sold all of their PLM stock years earlier, and then said they would seek to replace PLM after 2030, then I might be more concerned, as that would be akin to Aeroplan / Air Canada all over again.  But this is clearly a very different circumstance. 
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on December 19, 2019, 06:28:41 PM
The Q3 MIM letter is now circulating.
https://seekingalpha.com/article/4313273-mittleman-brothers-q3-2019-investor-letter
http://www.mittlemanbrothers.com/performance/

They report that they feel that they've turned the corner in the last few weeks...
They remain optimistic concerning realizable value at Aimia but this is hard to reconcile with the Alexander valuation report and with the most recent relevant transaction, the Gol-Smiles one.
Title: Re: AIM.TO - Aimia
Post by: wabuffo on December 27, 2019, 07:38:44 AM
Aimia issued a press release today reminding investors of its upcoming NCIB deadline.  I don't seem to recall a similar reminder earlier this year on the first tender (which was oversubscribed).   How to interpret this reminder...hmmm.

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on December 27, 2019, 08:06:39 AM
^The reminder is one-sided which would suggest that the lack of interest may be unilateral.
Also, the price action today suggests the common side of the bid may be crowded.
Anyways, this is mostly short term noise and the real fundamental action is set to occur later in 2020.
Will this be another bozo year?
Title: Re: AIM.TO - Aimia
Post by: wabuffo on December 27, 2019, 08:14:15 AM
Will this be another bozo year?

I believe so, yes.  8)

wabuffo
Title: Re: AIM.TO - Aimia
Post by: wabuffo on December 27, 2019, 10:28:37 AM
Also, the price action today suggests the common side of the bid may be crowded.

It also sounds like the preferred tender at the Company-offered prices is meeting resistance - which subtracts value for the common if it is way under-subscribed.  I thought they had Mamdani on-side...

wabuffo
Title: Re: AIM.TO - Aimia
Post by: YVRtrader on December 30, 2019, 10:16:12 AM
Credit Suisse Securities (Canada) has purchased 6,518,330 shares since the announcement of the SIB and you can be sure they'll tender every share.  They did the same thing for the last SIB, then dumped their remaining shares aggressively.  They won't get a 77% proration this time.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on December 31, 2019, 11:49:46 AM
The oversubscription for both the common and preferred shares has been very high.
Due to the issuer bid with the valuation exercise, I wonder if insiders have not set themselves in a tight spot if Aeromexico submits a bid for the entire enterprise. The new team would try to negotiate and they do hold a relatively significant stake but the infatuation for the common buyback is hard to reconcile with the valuation that MIM reported at the end of Q3 for AIM.

Some numbers:
Total shareholders' equity (-53.2M reported for PLM) is expected to be about 519-125=394M at the end of Q4 2019. Apart from the recurrent stuff, I assume some positive contribution from the last Cardlytics sale during Q4 to balance the residual negative legacy costs.

Given that the retail crowd and the majority owner of preferreds are yelling "we're for sale", here are some possibilities and the resulting price tag for the PLM entity form Aeromexico's point of view.

Offer:     commons: 4.25     preferreds: redo of last bid                 price tag for PLM: 175M (CDN)
Offer:     commons: 4.50     preferreds: redo of last bid                 price tag for PLM: 200M
Offer:     commons: 4.50     preferreds: half-way back to par         price tag for PLM: 231M
Offer:     commons: 5.00     preferreds at par                               price tag for PLM: 311M

I think the new Aimia has set itself up to be an easy target and that may not be the worst case scenario.
The following is sentiment-based, but, if post-buyback AIM's buyback history is any guide, common shares are likely to trade down in the next few weeks.
Happy new year.

Title: Re: AIM.TO - Aimia
Post by: wabuffo on January 02, 2020, 12:49:40 PM
I think the new Aimia has set itself up to be an easy target and that may not be the worst case scenario.

CB - I think you make an astute observation.   Aeromexico's senior mgmt must be watching this and realizing that they could make a bid for AIMIA's common shares at a price not too far from their $180m USD rejected offer for the 49% stake (when you adjust for AIMIA's bag of cash/bonds plus tag-end assets).   They see that at $4.25 they would get a stampede to sell and get control of PLM (albeit through a cumbersome structure) and even strand the preferreds.  I haven't done the math - but I'm sure someone at Aeromexico is doing it.

I fully expect an offer is coming in 2020 and I don't think it will be anywhere near where Mittleman wants it to be.

wabuffo

Title: Re: AIM.TO - Aimia
Post by: Pref User on January 03, 2020, 07:29:46 AM
Dr. Aybolit, after reading your post on December 14 I now get why you want the dividend recap and it makes a lot of sense. The PFIC rules will really tighten or force Mittleman's hand, especially since they won't have control of the board so they can't just make an acquisition without permission. So does that leave us with three possible outcomes? First, Aimia makes an acquisition which then allows Aimia to sell PLM. Second, Aeromexico acquires Aimia for its PLM ownership. Third, nothing happens and the value continues to dwindle away.

As for the acquisition of Aimia by Aeromexico to get PLM, does anyone know the voting rules for Aimia on transactions? Is it supermajority or is it 50%+1? Cause if it's supermajority Mittleman is back in control as they only need to get another 4% of votes to block anything, or just get the Fisher group on their side. If that is the case we are now all slaves to a new owner who we thought had the same incentives as us but apparently not. 
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on January 03, 2020, 08:48:12 AM
There are various scenarios but the path leading to AeroMexico buying Aimia could be defined quite rapidly. The following is an opinion and legal technicalities (form or arrangement etc) may have an impact but my understanding is that 66 2⁄3% of votes are required for further steps leading to regulatory and, ultimately, legal approval. If this happens, this may be straightforward or complicated, may happen in one or more steps, may alternate between friendly and hostile, may involve parallel dealings between the common and preferred side. The key player is MIM and they have decisive weight but they are in a relatively weak position for many reasons, including the fact that their main holdings (eg REV and AMC) have done poorly (in terms of market quotation and on a relative basis) in Q4.

If interested, it may be relevant to compare to a relatively relevant comparable when Lowe's acquired RONA in 2016.
Timeline
-2/2/16     acquisition agreement announced, offer CS 24$  PS 20$ + accrued interest (par 25)
-31/3/16   CS vote 99.9% yes     PS vote 74.8% no
-agreement 'amended'
-20/5/16    transaction closed, acquisition completed (control)
-decision to keep preferred shares, as stranded, reporting requirements adjusted to new status
-various options considered and main holder of preferred shares 'consulted'
-fall 2016   new offer to buy preferreds because of (presumably) relatively high and tax-inefficient financing costs, listing costs and reporting costs, at 24$ (clean price)
-15/11/16  PS vote 95.2% yes
-done deal
The end

The above (IMHO) helps to gauge the odds and I made my mind for the 'value' that should be offered to CS and PS. I also just sent a detailed letter to relevant boards on the acquirer's side to help balance the 'fairness opinions' that may be asked along the way and to support what I perceive to be weak actors on the acquiree's side.
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on January 03, 2020, 01:02:07 PM
Cigarbutt- thanks for all your work on this.  i'm not sure i am understanding you though...  are you saying that the PFD shares would get a vote if Aeromexico were to bid for Aimia?  i don't think that is the case?

and do you have a position here?  based on your comments it doesn't sound like you would be long... but it also sounds like you sent a letter to the board of Aeromexico and PLM telling them they should try to buy out Aimia?  and if you did do that, it seems odd that you would do that when it seems like Dr Aboylit's ideas about value would have so much more upside?

and also, if aeromexico were to try to buy Aimia, how would they pay for it?

thanks
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on January 03, 2020, 02:07:50 PM
^I'm long both the preferred and common shares with a similar 'expected' outcome, with the upside and downside magnified for the common exposure and i don't intend to hold for the long term.
If Aeromexico goes for it, I assume that they could obtain financing (plain vanilla debt or through credit card issuers cash 'infusions") given the profile of recent similar transactions. It seems to me that lenders would be more flexible (rate, terms etc) in the case of a parent debt-funded acquisition versus a sub debt-funded dividend (especially given the EBITDA multiple range that would be applied for the acquisition). I would be surprised if Aeromexico goes along with a dividend recap scenario (unless somehow forced to) as it would entrench Aimia's PLM ownership more. I think they want to get rid of them at the lowest possible price.
AFAIK, there is no change of control provision in the preferred share 'indentures', so a vote for control is not necessary. However, i come to the conclusion that, on a weighted basis, the disadvantages of keeping stranded preferreds are more important than the advantages, especially if a formal take-over is contemplated.
But I think it would help if our local dreaming-to-be-investment-banker would write to respective Boards to get discussions going. :)
I also hope that Aimia is proactive and trying to get offers for their legacy loyalty business.

Title: Re: AIM.TO - Aimia
Post by: Homestead31 on January 06, 2020, 10:37:58 AM
so it sounds like you are willing to sacrifice potential upside in the common in order to protect your investment in the pfds?  because why else would you write to encourage aeromexico to try buy out all of Aimia, and thus "steal" PLM for a low price, rather than root for Dr. Abolyit's plan, which would have much more upside for the common, but probably no impact on the pfds?

That isn't a criticism by the way - that is just level setting.

moving past that, i think you are right to think that Aeromexico wouldn't want to go along with a dividend recap unless they were forced to, but it seems like we are pretty close to that point, no?  i mean, T12M Aeromexico had $7M in EBIT and $96M in gross interest payments...  that isn't a recipe for success, and a cash infusion in the form of leveraging PLM and then dividending cash to the parent would of course help solve that problem.

As for financing a potential acquisition, i don't think they'd want to / be able to take more debt at the parent level as they are already pretty stretched.  the cash infusion from CC partners seems to be an option, but there also seems to be a chicken and egg problem there which i would think makes trying to go after Aimia rather than just PLM more difficult.  In other words, in order to bid for all of Aimia, PLM will need "funding secured" in order to deal with what would likely be a contentious battle...  but i don't think the CCs would be willing to give them that money unless the outcome was predetermined.  that of course leaves equity which could come in the form an equity raise (presumably 50% backstopped by Delta), but that would likely come at a significant discount, or in the form of using equity as currency, which seems unlikely to be supported by Delta since it would dilute their position.

i still think Delta makes sense as a buyer of Aimia's PLM stake rather than Aeromexico.  Simply stated, airline loyalty businesses are much better businesses than the business of actually flying planes.  Mexican stock ownership rules mean that Delta can't own more than 50% of Aeromexico unless they bid for the whole thing (or get an exception granted), and it seems unlikely that AMLO would want the country's flagship airline to be owned by a US company, but as PLM is not public there is nothing i am aware of (i am definitely not an expert here though) that would complicate the idea of Delta bidding Aimia for PLM and thus bringing their economic ownership of PLM to 75%.  Given the control they have at the aeromexico level, it is difficult to see aeromexico doing anything to sabotage Delta if they were to do this. 

 
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on January 06, 2020, 03:14:46 PM
^Simply stated, this is not to obtain a good deal for one side at the expense of the other, it's simply (my perspective) to assess the best risk-reward outcome from a total enterprise value point of view. So, it's a matter of assessing scenarios from a likelihood or possibility point of view. I'm all for it but I don't think a dividend recap is in the cards. I could be convinced to hold this for the long run but that would involve building enough confidence in MIM and acolytes and showing how a delay in monetization of PLM could make sense. The valuation parameters for PLM will lie between Velocity (more on that below) and GOL-Smiles (more towards the latter IMO) and will tend to gravitate towards a Multiplus-like multiple or worse over time.

In terms of Aeromexico (directly or indirectly) buying PLM or Aimia and the financing required, take a look at the link below (the whole document is interesting but especially pdf pages 65-67 and 83).
https://www.morgans.com.au/morgans-assets/PDFs/Virgin%20Australia%20Notes%20-%20Prospectus.pdf
Quite frankly, if MIM et al can negotiate a PLM deal valued at 16.1x segment EBITDA (or a 14.0x, "post cost synergies"), I would be ready to pay these guys a 2-week all-included Caribbean vacation but, with reasonable reserves, I would submit that they apply value precepts that could work under selective circumstances but don't seem to have what it takes to capture the PLM value during this transition and that's why (I'm not sure this makes a difference) I send materials to different parties in order to build some kind of defence (floor in value) as Aimia is IMO relatively vulnerable at this point (buyback with an implied low 'Alexander report' PLM value lower than what MIM accounts for, fund redemption pressures to come etc) but pushback would be welcome here if I'm wrong. Leverage (as far as I can tell, need to dissect fleet financing from 'financial' debt) at Aeromexico is comparable to Virgin Australia (before debt incurred from the Velocity stake buyback) and that did not stop the Velocity buyback. Note that the 700M raised (of the 750M total) has an 8% interest rate to it meaning that the 35% stake has a "pro-forma" interest stripe to it of 56M compared to a segment 3-yr avg EBITDA of 46.3 and a segment 3-yr free cash flow of 42.2, implying that the value from the transaction will not come from interim cashflows but from the terminal value with a starting point at 16.1x EBITDA. Again, if they pull a Velocity buyback trick, I will amend and accept that they are great but I don't think this is a reasonable scenario. So, given the related access to debt for Virgin Australia and the incredible thirst for yield (the Velocity-related debt issue was increased due to significant demand), I don't think access to debt for Aeromexico would be a problem, especially given the absence of debt at PLM and the more reasonable acquisition parameters and related faster payback period. BTW and FWIW, I wake up sometimes and hope that we don't live in a financial Alice-in-Wonderland world but it seems that we do, still. Somebody else seems to think that we live in interesting times:
https://www.livewiremarkets.com/wires/virgin-australia-s-very-junky-debt-raising

And add to that today's announcement that Aeromexico has settled a hanging cloud:
https://business.financialpost.com/pmn/business-pmn/aeromexico-reaches-compensation-deal-with-boeing-over-max-crisis
Title: Re: AIM.TO - Aimia
Post by: Dr. Aybolit on January 07, 2020, 12:40:49 AM
Just got back from a nice little vacation in Mexico with my grand children in tow; sadly we did not fly Aeromexico.

the talk on this board seems to continue to center around a sale of PLM or Aimia, neither of which seem to be the most likely outcome here given the size of the two largest shareholders' ownership stakes (combined likely close to the 33.3% needed to block any takeover) and their seeming intent to make Aimia into an investment vehicle, and avoid PFIC designation.

but that doesn't mean the stock doesn't satisfy both the longer term ambitions of those largest shareholders, and the shorter term time horizon of the more vocal message board posters.

i think Aimia here at C$3.53 is an awesome risk/reward ratio, with the Advent-Lifemiles-Avianca model being the most likely path forward.  i reiterate (from my dec. 14th post here):

"PLM has grown membership from 2.7 mil. at inception of the JV in late 2010 to 6.6 mil. as of Q3 2019, a 10.4% CAGR, with gross billings, EBITDA, and FCF growing faster.  The projections in the Alexander Capital report show all key metrics more than doubling over the next 10 years, so call it 7.2% growth going forward.  So unless one believes that Aeromexico would actually blow up Club Premier after 2030 rather than pay a fair price, i think time is on Aimia's side.  Also, selling that 49% stake in PLM would almost certainly make Aimia a PFIC, so I don't think they can do it, at all, at least until they have acquired enough in the way of other businesses to avoid that designation which would be toxic to their now largely U.S. investor base.  That's why I think that rather than attempting to sell PLM they should pursue a leveraged recap to payout a large dividend like LifeMiles did, to the great benefit of both Advent and Avianca."

Aeromexico acknowledged being a little low on cash on their last quarterly conference call, in response to an analyst question, and that they were considering ways to raise capital to cure that.  I would think that leveraging the loyalty program would be the easiest and highest ROIC way of doing so.

Lastly, I am flummoxed by the skepticism about the activists here, and their supposedly misaligned incentives or ineptitude.  Did they not save us, all Aimia stakeholders, from the most odiously disinterested group of non-owner sycophants ever, and at huge cost and risk to themselves?   Would you prefer the old regime remain in place?  I could care less if they get "control" or not, but I am very happy to have major shareholders at the helm who seem reasonably adept with a decent long term record, even if they are not the second coming of Buffett, or the third coming if Prem Watsa was the second.   

But I wonder what skepticism Prem Watsa might have encountered at age 35 when he took control (control! oh no!) of Markel Insurance in 1985 (while he was still running his 1 year old money management firm, Hamblin Watsa) and turned it into Fairfax.  Isn't Aimia a far better risk/reward today than Markel/Fairfax was then?  Markel had blown out their combined ratio (143% in 1984, 127% in 1985) and was losing money and needed a capital infusion from Prem's group to survive.  Their book value per share had fallen from $11.29 in 1983 to $3.65 in 1984 to $2.25 in 1985.  It was a real turnaround situation, whereas even if you assume zero value for the rest of Aimia's businesses, PLM is recession-proof and doing US$90 mil. in EBITDA and converting US$60 mil. into FCF and growing double-digits alongside the flagship air carrier of Mexico.  I'm not saying Aimia will become another Fairfax, but just compare and contrast the starting points of those situations at those moments of change. It should not require an investing genius to at least see this through to a 100% gain from here, and in very short order i would think.

or maybe i just had one too many Margaritas down there...  but I do feel unusually optimistic about this one.

-Dr. Aybolit
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on January 07, 2020, 06:35:28 AM
thanks for the thoughts from both of you - definitely very interesting game theory here.

it seems like Dr. A's point about PFIC status are under appreciated.  basically, Aimia can't just sell PLM, so Aeromexico's only option to take ownership would be to try to buy all of Aimia, but it seems like there is a blocking position in place.

If that is the case, then Aeromexico's options are to either:
 1) wait a decade and try to build out a competitive offering. 
      -  The operational hurdles here would be very high - note that Air Canada has had problems just making changes to Aeroplan, let alone building a whole new offering from scratch.
      -   this would be status quo, at a time where it seems like aeromexico could use a couple hundred million bucks
      -   ultimately aeromexico is going to want/need 100% control, so it might be worth just waiting it out

or 2) pursue the dividend recap
      -    no operational hurdles
      -    a few hundred million bucks never hurt anyone
      -    perhaps they can structure something where the two sides agree to do the leveraged recap in exchange for aeromexico having an option to buy the whole thing at a fixed multiple at some point in the future.  For example - agree to a dividend recap and agree that aeromexico has a call option at 8x EBITDA in 2028 (just making that up - but you get the point).

it seems like for Aimia shareholders option 1 is not very exciting in terms of near term impact, although assuming the activists can do something with the loyalty business (shut it down/sell?) and really get a tight handle on corporate costs and then make an acquisition to build some excitement then things could still work very well over time.   Option 2 would be a complete home run for Aimia shareholders in the near term.


Switching gears - i think in their Q3 letter MIM said 11x EBITDA for Virgin Australia/Velocity, but the source doc says 16.0x.  Is that just reflective of IFRS 16?  or perhaps backing out the points liability from the EV?
Title: Re: AIM.TO - Aimia
Post by: Dr. Aybolit on January 07, 2020, 07:33:24 AM
Velocity being quoted at 16x EBITDA by Virgin Australia, but that includes the points liability.  without it should be about 11x.   economically the lower multiple is more reflective of the cash reality and is the industry convention for quoting these multiples.  i think in quoting the higher multiple VA is hoping some of that rubs off on their stock as they own it all now.
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on January 07, 2020, 09:28:47 AM
just rereading the thread here as well as some commentary on other message boards.  there seems to be a view that Mittleman/Frischer were behind the recent buybacks.  The more i think about that, the more I think that view is wrong.  If you go back through Mittleman's letters, in one of them they talk about how attractive the preferred shares are as a way to finance the business.  basically perpetual cheap debt.  yet, the company just did a tender offer for the prefs, which makes absolutly no sense if you are solely focused on the common, as is the case for Mittleman and Frishcher.  I think that suggests that the  old board insisted on the $4.25 price for the common and the repurchase of the prefs as terms of their agreeing to step down. 

in my view, over paying for the common and buying the prefs at all can only be justified if they were deliberate attempts by the old board to weaken the resources and position of the new board.  i realize this isn't any kind of major breakthrough here, but if we have evidence that suggests that the old board was trying to weaken the position of the new board, i think  that the valuation performed by Alexander Capital should be viewed in that light.

in other words, it is totally possible that the old board instructed Alexander Capital to come up with a low ball valuation just to handicap the new board, so keep that in mind when using the Alexander valuation as a reference point.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on January 07, 2020, 02:32:42 PM
^Perhaps useful to think of this exercise as a way to define the best way to unlock value. :)
Looking to be convinced.
From strategy to valuation and back.

-Strategy
Are you suggesting that the valuation report came up with a low valuation and that the 4.25 buyback price was high even if 4.25 was somewhat lower than the lower range of the Alexander report??

-Valuation
How can a buyback at 4.25 be detrimental when the fair value assessment is way higher than what is estimated for the common equity (and prefs at par)?

-Strategy and valuation
Whatever happened before, the outcome of this investment (especially common equity but also preferred equity) will be related to:
1-the way value is unlocked at PLM
2-the investment acumen and results of MIM and others

For 1-, shareholders in Aimia before 2016, in Multiplus and in Smiles, eventually after, were surprised by the turn of events (anchor partner) and value recovery suffered. Why? Even after Air Canada announced the non-renewal, there was widespread institutional feeling that investments in Multiplus and Smiles were secure (I can supply a Credit Suisse report if required). What objective criteria suggest that MIM and others will be able to obtain a more favorable result? Where are the credentials in loyalty and in financial dealings with predators?
For 2-, I'm in the process of reviewing MIM's past investment record. There are areas of strength and the value theme is present. However, they have not done well in the last 6 years (absolute and relative) and, so far, the conclusion I come to is that they have switched to levered and risky bet plays which may eventually pay off but which also may hurt results ++. For example, take Revlon. This is a company that can be assessed by attributing probabilities to various outcomes. MIM expects value recovery form an outside party making selective or outright acquisition(s). It's possible. However, in my own humble assessment, I come to a weighted intrinsic value below where the shares are trading because the most likely outcome may be that Mr. Ron Perelman opportunistically makes an offer in an environment where minority holders will not be able to refuse (perhaps in a similar trap that is being set up for PLM). They keep mentioning that mean reverting forces should eventually help results but I've never found that this explanation, by itself, to be enough to become comfortable with a strategy or an investor.
www.mittlemanbrothers.com/performance/
So, I'm slowly running out of conviction as it seems to me that Aimia's future hinges on unsubstantiated hope, expectations and optimism.

Note to Dr. A: In the late 90's, I got interested in the Fairfax story and, based on valuation and sufficient trust perspectives, in the following years, I invested significant portions of my portfolios (including my children's accounts, and, at times, using significant leverage) in Fairfax securities but I absolutely don't come to the same conclusion for Aimia now (for both the valuation and trust perspectives).
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on January 07, 2020, 04:36:45 PM
i am suggesting that it is at least possible that the old board deliberately tried to destroy value and/or prevent the future realization of value under MIM in an attempt to appease shareholders that had supported them in the past.  in other words, i do think the 4.25 buyback price was high - not in relation to intrinsic value, but in relation to market conditions.  any dope can look at the results of the first tender and how over subscribed it was and realize that you could try to pay a lot less the second time around.  when you factor in a clear shift in strategy going forward, you have to know there are some people who will just want out.  if you are acting as a fiduciary to ALL shareholders you would try to pay the lowest price possible.  if you are just trying to help out exiting shareholders who are exiting b/c they had supported you, then you would try to pay more. 

that is for the common.

there is absolutely no way to justify tendering for the prefereds if you care about the long term potential of the business.

to be clear - i still think 4.25 was accretive - but there is zero doubt in my mind they could have done a dutch tender with the range significantly lower and gotten filled at the lower end, or even just a regular tender at 4.00 or 3.85 even and gotten filled.  i think based on the amount of oversubscription at $4.25 you will have to agree with this assessment Cigarbutt.

the point is, i don't think the recent buybacks were MIM's / Frischer's idea, and yes i am suggesting that if the old board deliberately failed to do what was best for shareholders in an attempt to reduce the resources that the new board will have, then it is also possible that the old board deliberately encouraged a valuation report that understated the real value of the company.  now, of course valuation is subjective - and alexander could and did justify there valuation quite easily.  all i am saying though is that i don't think the old board fought for a higher valuation report which could then be used as a negotiating tool with aeromexico or delta.

Title: Re: AIM.TO - Aimia
Post by: wabuffo on January 07, 2020, 06:17:37 PM
i do think the 4.25 buyback price was high - not in relation to intrinsic value, but in relation to market conditions.

You could say that about the preferred buyback prices too -- by the looks of the response.  Some of the preferred issues were even more oversubscribed than the common was.

This BOD has no feel for markets or capital allocation.  That's been their MO - panicky, public-relations-driven capital allocation decisions that make them collectively look like the "patsy at the poker table".

wabuffo
Title: Re: AIM.TO - Aimia
Post by: Dr. Aybolit on January 07, 2020, 11:09:54 PM
Cigarbutt,

My Fairfax analogy was from the change-over in 1985, when the stock closed at half of its book value in that first year in which Prem took over and hired his money management firm to manage its insurance funds.  I think given the severe downturn in underwriting results that business produced in the years leading up to that point, and Prem's limited track record at that point, and the conflicts of interest, what a leap of faith it must have required to invest then, and wouldn't Aimia seem far less risky at this moment.  that was my only point in making that comparison.

But I think the Fairfax example that you gave, which you experienced, is especially instructive from the time frame in which you got involved.  After an incredible run from 1985 to 1999, Fairfax (FFH CN) began a 6-year stretch of severe under-performance.  Book value per share was C$226 on 12/31/99 and C$160 on 12/31/05, a 29% decline over a 6-year period in which the TSX total return was +48%.  The stock price was down from C$246 on 12/31/99 to C$168 on 12/31/05 (-32%, -29% with dividends) after briefly hitting a low of C$57 on 1/20/03.  But despite that harrowing period of severe under-performance, anyone who held on saw a return to market beating results, such that the past 20 years from 12/31/99 to 12/31/19 has seen a CAGR of 6.44% from the shares' total return vs. 6.23% from the TSX, and book value per share is expected to close 12/31/19 at C$613, a less impressive 5.1% CAGR over those 20 years.

Clearly, you found the necessary confidence to believe in a return to out-performance despite that extended period of poor results from Fairfax from 1999 to 2005. 

I find it much easier to do so here with Aimia because I think the core business here (PLM) is much more attractive and less confusing than the myriad of insurance and reinsurance companies that comprise Fairfax.  But I will admit that I did not invest in Fairfax during that most opportune period.  I considered it seriously during the time it went from C$100 to C$57 in 2002-2003, but the short sellers' reports really spooked me, and i found things that I liked better (late 2002 was a great time to be hunting for bargains), so I didn't buy Fairfax then and I regret that.  congrats to you for having done so and for being long this little Fairfax wannabe.  I take that as an encouraging sign despite your more short-term time horizon on this one and more conservative view of fair value.

- Dr. Aybolit

Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on January 08, 2020, 06:15:51 AM
Fair enough Dr. A.
The past is relevant in so far that it may help to define mispricings, whether to be discovered shortly or in the long run and poor past performance does often result in a perception that may contribute to mispricings but it's the future that counts.

For Aimia,
-I don't presently like the idea of putting 20% excess cash in Revlon, for instance.
-And if I were Aeromexico, I would have an idea what to do for PLM, at this point; scenarios which won't be disclosed on a public forum and for which I hope our new wannabes are ready to deal with.
 
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on January 08, 2020, 06:43:35 AM
Fair enough Dr. A.
The past is relevant in so far that it may help to define mispricings, whether to be discovered shortly or in the long run and poor past performance does often result in a perception that may contribute to mispricings but it's the future that counts.

For Aimia,
-I don't presently like the idea of putting 20% excess cash in Revlon, for instance.
-And if I were Aeromexico, I would have an idea what to do for PLM, at this point; scenarios which won't be disclosed on a public forum and for which I hope our new wannabes are ready to deal with.

what makes you think that 20% of excess cash would go into Revlon?  or that any of the excess cash would go into any of MIM's positions? it is certainly possible, and some of their names i'd love to hold - but i don't think there is any indication that that is what is going to happen here.

my assessment of MIM's track record is that while recent STOCK performance has not been good, in most cases the BUSINESSES that MIM has owned over the last decade or however back you can find records have generated lots of cash flow.  The problem that they have is that in today's stock market, cash flow is a bad thing (growth at any cost!).

however, if MIM has the ability to identify businesses that generate cash and are cheap - that is the ideal skill set for a hold co structure.  Generate cash - kick it up the chain, reinvest it, and repeat.

surely this is not lost on MIM as they have owned many holdcos over the years - and surely this is not lost on the other members of the reconstituted board of directors who probably don't want to own Revlon anymore than you do....  so i really don't think this is going to be a situation where MIM uses the cash to just add to existing positions...
Title: Re: AIM.TO - Aimia
Post by: Pref User on January 08, 2020, 07:58:31 AM
Homestead31 on the preferred shares I don't think it was done to cripple the new Aimia, I think it was discussed in the form in the past that it was believed to be done to get PH&N fund on MIM side. In the preferred prospectus, any series could change the terms of the prospectus with a 2/3 vote in favour of a change. PH&N had 2/3 of series 1 & 2 and 60% of series 3 (so if no one showed up to vote then they would have enough). I worked out the math that if management gave terms to the preferred shares that they would be repaid par in common shares the new proxy vote would lead to management carrying the day as it would finally give PH&N the liquidity event that they have been looking for, and it would be my guess that some back door dealing would be done that part of the deal PH&N would for their shares received vote in favour of the current management.  I know that is speculation, but if that happened the current management would carry the day based on previous vote analysis and it would dilute MIM by almost half making MIM less relevant unless MIM wanted to put more capital to work in the name.

In the end I think the preferred deal was done to get PH&N onside and lead to the current management realizing they could never win a vote. The price offer for the preferred shares only made sense for investors who bought before the Air Canada deal, everyone else is losing money on the trade, or at least a very small group is making money.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on January 08, 2020, 10:30:26 AM
Somebody reached out for some info (that deals with potential downside).
So, to balance what is being prepared to deal with the upside (I guess), here:
https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&sourceid=csplusresearchcp&document_id=1076077661&serialid=bEgJTK6cGryWMbHjGREee83G%2FENa1dsABciWj4Yx34w%3D
https://hbk.bb.com.br/hbkDocs/MPLUFR.pdf
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on January 14, 2020, 06:04:58 AM
Delta reported today - i haven't gone through it, but quick highlights are $4.1 billion in free cash flow, and leverage at the low end of their targets.

I still think that if Aimia wanted to sell PLM - and I don't think they do in the near term - Delta would be the best buyer, and Delta could pay a fair and full price with no problem at all.

Aeromexico's original bid was a joke - but a completely rational joke.  The old board had already demonstrated through the "sale" of Nectar that they were completely incompetent and did not understand the value of loyalty businesses, so why not just lob in a bid and try to take advantage of the incompetence?  Similarly, i think there is a credible case to be made that the Alexander capital valuation is flawed - perhaps intentionally so.

Time will tell.
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on January 16, 2020, 06:26:55 AM
Interesting pitch on Delta from the Manual of Ideas (MOI) best ideas conference: https://moiglobal.com/adam-j-schwartz-202001/

the key takeaway from the pitch is that credit card fees that Delta gets from American Express justify the entire purchase price of the stock, meaning you get the planes etc. for free.

I don't have a strong opinion of this view, but I'd be willing to bet that the people at Delta do, and it seems likely they realize that the cash flows from credit cards are more valuable than the planes.

Hard to believe Delta wouldn't pay a fair price for Aimia's stake in PLM if Aimia did indeed want to sell it.
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on January 16, 2020, 06:32:22 AM
.......aaaaaaand credit suisse out with a research piece also suggesting that the cash stream from american express justifies the entire market cap of Delta.  just showing that the folks at black bear value fund aren't completely crazy or anything.  other people get it too.
Title: Re: AIM.TO - Aimia
Post by: Dr. Aybolit on January 16, 2020, 08:17:15 AM
Yep, and imagine if you could invest in the best part of an airline, without the heavy cyclicality of an airline attached, oh wait...
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 05, 2020, 04:07:07 PM
Just in case Aeromexico is going after Aimia, as there seems to be a window of opportunity that would constitute a reasonable compromise, here are some relevant inputs.

The most relevant comparable is what is going on with GOL buying back the 47% it doesn’t already own in Smiles. The recent offer would put the market cap for Smiles at around 5.2B. With the trailing last four quarters’ EBITDA at 762M, this would imply a multiple of 6.8.

Applying this multiple to the trailing last four quarters’ EBITDA for PLM (85.2M USD) results in a total enterprise value of 377M CDN for the 48.9% interest held by Aimia.

Assuming negative drag from ongoing loyalty operations, tax issues, severance and liquidation costs being balanced by inflows from the last Cardlytics sale and potential upside on BIGLIFE and others.

If Aeromexico is going for a purchase of Aimia, here’s the consideration per share they should pay:
572M (equity at end of Q3 2019) -125M (cash used for buybacks in Q4) -236M (value of residual prefs at par) + 324M (value of PLM interest-53.2M recorded on balance sheet)= 535M. Given 93.84M shares after the buybacks ----)    = 5.70 per share.

MIM needs a win and a reasonable win now is better than an uncertain win later.

For the largest holder of the stranded equity, there seems to be pressure (self-imposed) to liquidate and start anew but there are clearly potential misaligned interests between the OPM’s manager with the reported positions (stuck) and performance (in limbo) and the typical investor who should expect full par value realization in the context of, essentially, a liquidation scenario. This raises question along the ethical, regulatory and even legal spectrum in the context of fiduciary duty and fair dealings.

GOL has recently produced some documents and has just signed a codeshare agreement with American Airlines and Aeromexico is testing the debt market.

https://www.sec.gov/Archives/edgar/data/1291733/000129281420000252/gol20200203_6k.htm

https://www.moodys.com/research/Moodys-assigns-B1-CFR-to-Aeromxico-B2-to-proposed-notes--PR_416715?WT.mc_id=AM%7eWWFob29fRmluYW5jZV9TQl9SYXRpbmcgTmV3c19BbGxfRW5n%7e20200126_PR_416715&yptr=yahoo

Title: Re: AIM.TO - Aimia
Post by: Homestead31 on February 08, 2020, 02:16:23 PM
Aeromexico has $260M of the $400M debt raise ear marked to repay existing debt and revamp their short haul fleet.... seems unlikely they would raise even more debt to go after Aimia.  I suppose Delta is another story, but it seems less likely that Delta would try to get cute and buy all of Aimia in pursuit of PLM. Thoughts?
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 09, 2020, 05:43:00 AM
Aeromexico has $260M of the $400M debt raise ear marked to repay existing debt and revamp their short haul fleet.... seems unlikely they would raise even more debt to go after Aimia.  I suppose Delta is another story, but it seems less likely that Delta would try to get cute and buy all of Aimia in pursuit of PLM. Thoughts?
If your question is:
Assuming Aeromexico is aiming to acquire Aimia, how would the deal be financed?
Here is a potential answer (simply a copy and paste of previous comments made by others):
-as mentioned above, Aeromexico has access to the debt market. The last 400M USD raised, as described, included a significant extra for general corporate purposes. It was the first time in years that a Mexican airline accessed the international unsecured bond market, the coupon was 7% and the issue was almost 3x oversubscribed.
-in reply #573, Dr. Aybolit suggested that PLM could complete a leveraged recap giving rise to a dividend capacity of 300M USD for the entity(ies) owning the loyalty sub.
-as mentioned, outside credit card 'partners' will be asked to participate, most likely through after-the-fact transactions.
-Delta could somehow provide bridge financing or some kind of support in the interim.

Note: This context reminds me of the time when Fairfax acquired Zenith in 2010. Fairfax had 8% of the shares and paid a premium to book value (34.5%) but the acquisition was done in a depressed valuation phase and both Fairfax and Zenith had excess capital. Fairfax paid the 1.3B purchase consideration for the shares not owned by issuing 200M of equity but most of the capital came from upstream dividends (insurance legacy subs) and a 259.6M dividend from Zenith, subsequent to the acquisition. I always thought this was a great transaction apart from the equity issue which seemed to be associated to a low price (IMO then). Post-acquisition and after the dividend to the parent, the net premium to statutory surplus at Zenith was 0.5 and Zenith still had regulatory dividend capacity.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 13, 2020, 10:12:46 AM
Aeromexico reported.

From the knowns to the unknowns:

-It’s hard to dissect what’s happening at PLM from the parent numbers (true for all airlines who tend to bury the loyalty numbers within the morass) and the Q4 2018’s breakage adjustment doesn’t help but in 2019 Q4 numbers show what appears to be a growing and healthy 21M USD* “effect from associated companies” and a 2019 year number at 81M USD*, corroborating the “adusted EBITDA” label (I would carefully say that Mr. Munger’s characterization of intellectual dishonesty does not really apply here for the loyalty units in airlines) that Aimia has consistently used over the years for loyalty cash flow generation.

-The narrative that PLM is broken has changed completely.
From their end of year release: “Associated company equity income totaled $200 million pesos during the quarter, a $587 million peso increase year-over-year.  It is important to mention that during the fourth quarter of 2018 a non recurring accounting adjustment was made, having no cash impact, resulting from the reduction in ‘breakage’ in the Club Premier loyalty program.  This resulted from greater engagement of Club Premier customers in the loyalty program, which increases point redemption and strengthens overall loyalty to the airline.”

From the conference call: “Well, just as you might remember, a few months ago, we did an offer to IEMEA (sic) and it was not accepted. So we have continued to work on the program. And basically, there has not been any new events related to that. We continue to work with IEMEA (sic) on PLM, trying to strengthen the program. And that's how we expect it going forward. I think if something comes up, of course, we will let you know. But at this point, given that there was no interest in doing something, our approach has been to strengthen the program as much as possible. We believe that if the program is strengthened, that would be good for Aeromexico. Will be good also for Club Premier, and that's our target now.”

-As far as when something comes, PLM strong it has been and still is and now seems reasonable but the story here hasn’t always been reasonable so who knows?

-----

On a related note, MIM disclosed their more recent "performance". An annualized performance graph is worth a thousand words:
http://www.mittlemanbrothers.com/performance/


Edit: * numbers estimated above are for the whole PLM, not only for AEROMEX's 51.1% interest
Title: Re: AIM.TO - Aimia
Post by: wabuffo on February 13, 2020, 12:24:26 PM
a bit of a tangential note - but it seems airline loyalty programs are drawing a lot of interest in the annual audit. 

The Delta Airlines 10-K has "Loyalty Program - American Express Contract Value" and "Loyalty Program - Mileage Breakage" as critical audit matters.  I guess it speaks to the growing importance of these programs to the economics of airlines as well as the fact that the accounting for these loyalty programs is tricky and full of assumptions.

wabuffo


Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on February 13, 2020, 02:49:12 PM
 I guess it speaks to the growing importance of these programs to the economics of airlines as well as the fact that the accounting for these loyalty programs is tricky and full of assumptions.


Do I decode an apprehension about the notion of playing with numbers or is it a general hunch similar to what Mr. Munger says about "bullshyt earnings" (adjusted EBITDA)?
In terms of substance:
-Looking back over a long period, Aimia has been quite pro-active with loyalty accounting and reporting and it has been possible to coherently reconcile their reported adjusted EBITDA numbers with cash flows from operations over many years with consistent balance sheet effects. I also think they dealt adequately with changing breakage assumptions. I assume that they continue to use the same framework with PLM as they were the fundamental founding partner and have remained the operator since then.

On a related note, Areomexico is going through a tough patch with the Boeing planes being grounded (they've obtained compensation for this) and with local low-cost competitors increasing market share with likely low or negative returns on capital and they are maybe realizing more the value of a loyalty operation that is fairly immune to airline cyclicality and even counter-cyclical because excess capacity can be filled giving rise to extra cash flows at times when core operations fail to produce them.

More recently IFRS 15 has come along and it seems that Aimia has integrated the standards:
https://www.aimia.com/app/uploads/2019/07/Aimia_Whitepaper_Liability-Management_Oct2018.pdf
Title: Re: AIM.TO - Aimia
Post by: Tuxedostyle on February 25, 2020, 07:31:35 AM
The board has been reconstituted and annual results announced.

https://sedar.com/GetFile.do?lang=EN&docClass=5&issuerNo=00027127&issuerType=03&projectNo=03020635&docId=4669958
https://sedar.com/GetFile.do?lang=EN&docClass=8&issuerNo=00027127&issuerType=03&projectNo=03020645&docId=4669972
Title: Re: AIM.TO - Aimia
Post by: Homestead31 on March 06, 2020, 12:40:34 PM
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).
- Dr. Aybolit

Cigarbutt, if you were writing to Aeromexico a few weeks back telling them they should buy all of Aimia, you should be writing to them today telling them that given the likely damage to global air travel over the next few months or quarters, they should now be considering Dr. A's idea of extracting some cash from PLM...  seems more likely now then it did when the idea was first raised, no?
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on March 06, 2020, 05:52:02 PM
^It does look like the window for a sale is closing. Given the recent shift in global air travel, a debt-financed dividend may make sense or even an IPO, depending on the parent's liquidity need, assuming credit spreads don't widen at large and if the market wants to cooperate. Grounded planes and stranded value seem to be the themes here.

I've been looking for the Q4 2019 commentary from MIM, which (Q4 letter) usually circulates at this time of year. Given a few reasonable assumptions, Q1 seems to be associated with, so far, a brutal absolute and relative performance with potentially high redemption pressures to come. Asking for more patience in turbulent times may be challenging.

Have you seen what is happening with Cardlytics? In the last year, its price went basically 10x (with AIM selling relatively early along the way, concurrent to a seasoned offering) and then recently went down by more than 50%. This thing has been hard to value and sentiment hard to predict. So who knows?
Title: Re: AIM.TO - Aimia
Post by: manuelbean on March 11, 2020, 03:15:01 PM
Cigarbutt, why do you say that there are high potential redemption pressures? Thank you for your help.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on March 11, 2020, 05:57:42 PM
Cigarbutt, why do you say that there are high potential redemption pressures? Thank you for your help.
I don't know the specific redemption policy at MIM but assume that investors can redeem periodically. I understand that they manage LP money and separately managed funds.
Today, MIM reported to CDN regulators that 10K shares had been bought and 534K shares were sold (presumably from SMAs).

The following is unaudited (and the numbers are estimates) and is derived from the 2019 Q3 letter and other sec filings.

Share symbol               % weight in MIM money pot (top holdings)             % performance since end of year to today (dividends not included)
      REV                                      ~20                                                                                        -30.2             
      AIM                                      ~20                                                                                        -33.9
      IGT                                       ~8                                                                                         -55.0
      AMC                                      ~7                                                                                         -49.7

Smaller holdings have done better, more in line with what happened to the R2000 index (which is down 24.0% YTD).
So, you can come up with your own conclusion at to what investors may want to consider in terms of redemption.   
Title: Re: AIM.TO - Aimia
Post by: samwise on March 11, 2020, 09:55:57 PM
If air Mexico goes banckrupt , does PLM suffer? Aeroplan used to dive whenever air Canada was in trouble, because they could then reject the contract.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on March 12, 2020, 04:45:17 AM
The relation between Aeromexico and Club Premier (PLM) is symbiotic.
PLM's survival is highly conditional on parent survival.
The sky is not clear and it looks like there's turbulence ahead but there are potential options.
Aeroplan did its part for Air Canada in 2009.
https://www.cbc.ca/news/business/air-canada-gets-1b-in-backing-1.824549
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on March 17, 2020, 04:51:42 AM
Cigarbutt, why do you say that there are high potential redemption pressures? Thank you for your help.
I don't know the specific redemption policy at MIM but assume that investors can redeem periodically. I understand that they manage LP money and separately managed funds.
Today, MIM reported to CDN regulators that 10K shares had been bought and 534K shares were sold (presumably from SMAs).

The following is unaudited (and the numbers are estimates) and is derived from the 2019 Q3 letter and other sec filings.

Share symbol               % weight in MIM money pot (top holdings)             % performance since end of year to today (dividends not included)
      REV                                      ~20                                                                                        -30.2             
      AIM                                      ~20                                                                                        -33.9
      IGT                                       ~8                                                                                         -55.0
      AMC                                      ~7                                                                                         -49.7

Smaller holdings have done better, more in line with what happened to the R2000 index (which is down 24.0% YTD).
So, you can come up with your own conclusion at to what investors may want to consider in terms of redemption.
This is a follow-up.
Disclosure of a mistake: This (Aimia equity securities) is a painful part in the portfolios now and, somehow, the "net-net" floor is being tested. The mistake was position sizing which I let slip upwards too much. Hopefully writing it will help in maintaining rational restraints in similar situations down the road. I now (wrongly) put the fault on the previous paucity of opportunities but position sizing should be an absolute concept, not a relative one.

Update, with the same reserves described above.

Share symbol               % weight in MIM money pot (top holdings)             % performance since end of year to yesterday (dividends not included)
      REV                                      ~20                                                                                        -57.1             
      AIM                                      ~20                                                                                        -38.3
      IGT                                       ~8                                                                                         -64.2
      AMC                                      ~7                                                                                         -64.1

      R2000                                   NA                                                                                         -37.7

Since the last post, MIM has reported net sales of 147K shares of AIM common equity, at a time when their self-determined discount to in-house IV calculations reached record lows.
As far as redemption pressures, i have no clue.
"Can't you hear, can't you hear the thunder
You better run, you better take cover"
Midnight Oil
Title: Re: AIM.TO - Aimia
Post by: manuelbean on March 17, 2020, 06:08:52 PM
Hi guys, what are actually the operating risks here? What might happen, what's the likelihood, etc? Don't spare your words, please. Thank you.
Title: Re: AIM.TO - Aimia
Post by: Pref User on March 26, 2020, 04:59:28 PM
Does anyone think a bailout of Aeromexico could actually be a catalyst to realize value for Aimia? To start off this theory only works based on the bailout and Aeromexico surviving.

My thought process, Aimia was created when Air Canada was in financial trouble they spun-off all of their quote-unquote unessential assets at the time and gave them sweetheart deals to boost their value (Chorus, That repair business that folded and Aimia) bring in a ton of cash for struggling Air Canada.

I was thinking there could be some contingencies on the bailout that Aeromexico needs to raise capital, and potentially extending terms on PLM and IPOing it would be the move to bring in cash. Assuming they did that at the $1B IPO price they discussed in the past this would bring in $511M USD which cover 26.8% of all their debt (excluding leases), without diluting shareholders (keeps delta happy, if they survive) and doesn't increase leverage in the business.

I also think that the preferred dividend will be stopped potentially for a year. The thinking, Aimia said on the Q4 call that they would be cash flow negative because of the taxes related to being a negative net income company but paying preferred dividends. This is somewhere around $10M, maybe more. I think PLM stops its dividend, as it is a negative working capital business, so when it stops growing its cash flow will turn quickly with less travel and people earning fewer points (i could be wrong here), which means goodbye $18M in the dividend from PLM. Yes, Aeromexico will hate that too, but I don't think that $18M will make or break Aeromexico because they already have a ton on their plate. Then I think there will be a drop in revenue at ILS, and let's say that leads to another -$15M in cash flow because they lose business or others cut back (ILS was private in 2008-2009 periods so I couldn't check back to see what happened then).

So it means keeping the preferred dividend Aimia for 2020 might be negative $43M in FCF, if you remove the preferred dividend, which I believe stops the taxes that save about $22M, which turns the cash burn to only $21M. At a $43M cash burn that is about 14% of their cash on the balance sheet used up. Currently, the only thing that I think could hold this back is that if the preferred dividend is stopped for the time being Aimia cannot return capital to shareholders until the dividend is fully paid. So Mittleman wouldn't be able to be buying back shares at a discounted price.

I would love to hear what everyone is thinking!!!
Title: Re: AIM.TO - Aimia
Post by: bizaro86 on March 26, 2020, 06:59:34 PM
I think PLM should be more cash flow positive than before. Redemption of miles is probably down by nearly 100% given how many flights have been cancelled.

But consumers are still using their credit cards and collecting points. While spending is probably down, it's almost certainly down less than flight redemptions.
Title: Re: AIM.TO - Aimia
Post by: Cigarbutt on March 26, 2020, 08:28:54 PM
-I think bizaro is right and Aeromexico is cash-starved (reducing capacity even more in April) so they will look at all options to extract cash from PLM (regular or special dividend, IPO, even a loan? etc). You may remember that Air Canada went into bankruptcy because of 9/11 but the triggering event was SARS 2003...Eventually, it restructured and completely spun off Aeroplan when the market was quite receptive to the idea. The typical scenario is that airlines spin off loyalty units when they need money and then buy them back when they have excess cash..

-If Aeromexico is looking for a bailout, they may not get a receptive ear:
https://simpleflying.com/will-mexico-bail-out-airlines-in-crisis/
This negative domestic context may however help foreign capital gain more control of Aeromexico (like Delta?).
Under present circumstances and for the foreseeable future, there's simply too much capacity in that market.

-As far as internal decisions at Aimia, this largely remains a block box. Just a note: the tax bill on the dividend is large in Q1 because it takes into account the dividends of 2019 that included the dividends in arrears.
Title: Re: AIM.TO - Aimia
Post by: Pref User on March 27, 2020, 09:12:21 AM
That makes sense that redemptions will be down, so they'll make the spread. I was worried that there would be a run on points for other nick nacks, Aeroplan allows you to redeem for gift cards. So if you were worried Aeromexico goes bust you redeem your points, but that is closed since everything is related to travel.

Cigarbutt thank you for the article, I had not seen that.

The no-bailout then means, at least looking at my sum of the parts model, that the market is pricing in PLM is worth $103.5M USD to Aimia, and if you want to be completely risk-off that if you don't want to put any value on PLM Aimia shares would be at $0.46. I know much of the debate will be around if you subtract off the full value of the preferred shares (i do because if the preferred shares are not money good why is the equity). If you don't include the preferred shares, which I can see the argument that if PLM is a zero then I guess my argument changes because there is an agency problem between common shareholders and preferred shareholders, where common is in control and they'll want to maximize value, so it could be possible to say preferred shares aren't money good but common is since they have the option of cash. Preferred shares only change to money good once Aimia turns itself around. In that situation, I have the common worth $2.97 with PLM being a zero.

Again would love thoughts
Title: Re: AIM.TO - Aimia
Post by: wabuffo on April 03, 2020, 07:22:53 AM
Can anyone explain what these asshats are doing here?

1) they are asking shareholders to vote on a reverse stock-split of either 3-, 4-, 5-, or 6-to-1 with an odd-lot provision. 

One of the downsides of this operation occurs if/when the Company defers preferred share dividends for eight quarters (the language seems to indicate that this is not on a consecutive basis - so the previous deferrals count aga