Aimia / Aeroplan / Air Canada proposed loyalty business proposal thoughts

Air Canada and some major banks proposed a $250 million cash buyout of Aimia’s loyalty business. They used a headline amount of a $2.25 billion buyout. They cited that $2 billion of this was the “assumption of points liability”, which is associated with Aimia’s (TSX: AIM) costs of purchasing rewards for their customers.

Since most of these rewards consist of flights provided by Air Canada, it stands to reason that Air Canada’s citing of the liability is wildly over-exaggerated.

Other notes:
* This is an asset purchase and not a “take-over” per se; existing management will still be in control of the entity
* Aimia still has a bit of debt to deal with, although $250 million will ease it considerably (they will probably end up in a net cash position)
* Aimia has no other potential purchasers of this business. Only Westjet can conceivably counter-bid (any other major national airlines in Canada? Nope!), but that is simply not going to happen for a variety of reasons
* Aimia really has no other business than their loyalty business concerning their Aeroplan program
* The proposal has a “respond by August 2 or forget it” hard-ball ultimatum

Shareholders have been given one hell of a gift and are lucky to see this. Preferred shareholders even more so.

Aimia management is basically forced to take this offer. It was very cunning of Air Canada to scrap the agreement, completely kick the bloody carcass into the ground, and then propose a low-ball offer to purchase up the unit, which is the business equivalent of an unconditional surrender after getting an atomic bomb dropped onto it. Well done Air Canada!

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So I am a bit confused. What does this mean for preferred shareholders? Will they have their shares redeemed at par and unpaid dividends paid out? I am also wondering about Mittleman Bros… not sure they will like this offer.

What is left of Aimia after this? There would be no real business left?

Justifying the maintenance of their management salaries would seem to be their next line of business. I really shouldn’t be so sarcastic but I’ve always wondered why people thought Aimia was a great investment (although the people buying the preferred shares for after they got hammered from the dividend suspension did have a legitimate “cigar butt” type case to be made but I did not believe in it myself).

Sacha….you must be sitting on the sidelines……5 posts in a week…..is that a record?

That cigar butt analogy makes me chuckle every time.

The conflicting opinions on this issue are what make it so fascinating. Here is the bullish Aimia view…

http://adventuresincapitalism.com/2018/07/27/air-canada-screwed/

I have to disagree with that one. No doubt AC is being opportunistic, but to start up a loyalty reward program isn’t rocket science and AC already has a lot of their flyer’s data – while they may end up pony up a few more millions – there’s no way AC will pay a billion for this. The bank run at Aeroplan continues and the assumption that Aeroplan could somehow direct that 2 million flights elsewhere is just ridiculous. Isn’t PLM another dying asset? If so, assigning a multiple is definitely wrong and it can only be valued base on discounted cash flow.

[…] And finally, both Divestor and Adventures in Capitalism had thoughts about the Air Canada-led takeover offer for Aimia’s […]

The Kuppy analysis referenced above is somewhat irrelevent.
The reality is that the analysis should be presented from the point of view of Amia, i.e. what will be the proforma of the business after AC has left the program. To do this you have to factor the cost of redemption in the new world, forecast the number of members, the additionnal marketing costs etc… The board has to decide if this forecasted EBITDA is better than the offer that is on the table, factoring in the 2B$ liability and the risk of going bankrupt in the case of a bank run, and a unfavorable contract renewal with TD. The fact that the business is worth more to AC than what it is worth on its own, allows us to calculate the synergies AC will make from the deal . Yes AC can pay more and still be ahead but can Amia reject the offer and still be ahead?

I agree, this offer is better than the alternatives. I just don’k know if cold headed analysis will prevail.

I am pretty sure the parties are also discussing other options. One could be that Amia would sell to AC a part of the book, let say the Altitude members. AC is mainly looking at protecting its best customers and would get a head start at setting up its own program while Aeroplan would still exist for the customers who are the less likely to switch. AC could even hire Amia to manage the program on a white label basis. Obviously the banks would negotiate with AC th right to remain the issuers in the new AC program. I still believe an outright sale is the best solution for shareholders, as I do not believe that Amia will have enough scale after departure to generate enough cash to counter the liability, but if current management truly believe in their plan post 2020, they could be tempted by this.