AIM – Divestor

Aimia – the gift that keeps on giving

I just can’t keep my eyes away from Aimia (TSX: AIM) which is a huge corporate soap opera that I am so glad I do not own.

According to Aimia’s posted statement of claim, we have one of the Mittlemen brothers going rogue, coupled with a Saudi-owned Cayman Islands corporation (Mithaq) that chose one of the worst Canadian publicly traded companies to target with their excess in capital. While they have likely blown over a hundred million or so on this venture, they apparently could not hire some junior security lawyer to write up a two paragraph memo explaining that once you get over the 20% threshold that some special rules take place. Or perhaps if they couldn’t afford a few billable hours, they could have just used Google.

84. Mithaq was aware of the take-over bid regime and understood the implications of crossing the 20% threshold. On February 2, 2023, Mr. Seemab sent an email to Mr. Mittleman with the subject line “Exceeding 20%?” and asked for help understanding “the process/implications if an investor exceeds the 20% equity threshold in the Canadian market?”

85. Mr. Mittleman advised Mr. Seemab that “if an activist’s goals can be achieved without incurring the complications of crossing the mandatory build [sic] threshold, that’s probably the easier / less expensive / better path. So I think 19.9% is probably sufficient”.

Oh my, this made for entertaining reading.

Aimia receives a go-private offer

Two going private offers in the same day!

Aimia (TSX: AIM) – a company I have written about here many times before in the past – is receiving a $3.66/share cash offer from its 30% shareholder, Mithaq Capital.

Needless to say it is terrible to be a shareholder of Aimia – do you take the $3.66 sure bet and cash yourself out at under 40% of book value (albeit dropping despite them having invested a ton of money into two private businesses) or do you hold on and put up with the completely sub-standard management that could have done far better by just sticking their money into an S&P 500 index fund? Tough decision.

One thing I do know – part of Aimia’s value proposition is its $269 million in capital losses that has accumulated since June 30, 2023. If this buyout does proceed, Aimia will not be able to utilize this. That said, glossing over their portfolio, I’m not sure how much in the way of capital gains management could realize going forward, so perhaps it doesn’t matter.

The only question I would have is for those preferred shareholders – they are very illiquid and are trading at around 12% yields at the rate-reset assuming the 5-year government bond trades as it is today.

The corporate soap opera at Aimia

I last covered Aimia (TSX: AIM) last September and things have progressed from bad to just outright hilarious (unless if you’re a shareholder).

Aimia had raised nearly half a billion in cash from the disposition of one of their legacy business units, leaving their balance sheet relatively open for investment. The company’s stated objective was to invest such proceeds in such a manner that could utilize their extensive tax losses, neatly summarized by this page on their last annual report:

What does the corporation do instead?

Two headlines:
a) January 31, 2023: AIMIA TO ACQUIRE TUFROPES FOR $249.6 MILLION

Aimia Inc. (TSX: AIM), a holding company focused on long-term global investments, has announced today that it has signed definitive agreements to acquire all of the issued and outstanding shares of Tufropes Pvt Ltd. as well as certain business undertakings of India Nets (together referred to as “Tufropes” or the “Company”). Aimia will pay a purchase price of $249.6 million (1) on a cash-free and debt-free basis

…

A family-owned business founded in 1992, Tufropes is expected to achieve annual revenue of approximately $130 million (1) for the fiscal year ending March 31, 2023 , and industry-leading EBITDA margins of 18%.

b) March 6, 2023: AIMIA ANNOUNCES ACQUISITION OF BOZZETTO GROUP FOR $328 MILLION

The purchase price will be based on an enterprise value of approximately $328 million (1) . It is anticipated that the acquisition will be financed with a combination of cash and debt, with an expected level of debt of around 3x Adjusted EBITDA, or approximately $135 million . Bozzetto achieved annual revenue of approximately $326 million (1)(2) and Adjusted EBITDA of $47 million (1)(2) with an Adjusted EBITDA margin of 14.5% (2) for the fiscal year ended December 31, 2022 , with higher than 80% free-cash flow conversion (3).

Quick analysis

Acquisition (a) invests $250 million for [$130*18%?] $23.4 EBITDA margins. Assume no “I” and a combined TDA of 40% and that leaves $14 million net income. Tufropes is an Indian corporation.

Acquisition (b) invests $193 million cash ($328-$135) for an “adjusted” EBITDA of $47 million. Let’s ignore “adjustments”, and apply an “I” of $135*7%, and according to the press release, claims a “free cash flow conversion of 80%” which miraculously assumes that a multi-country specialty chemical business has little in the way of capital investment requirements. Somehow, I don’t think so. Looking at Chemtrade, for example, we have 43% of their 2022 EBITDA going to capital and lease and cash taxes. But they are a trust structure, so I would suspect that Bozzetto would be paying more than 50% of adjusted EBITDA on this, but let’s round to half and you get $23 million. Bozzetto is an Italian company.

Add these up, you get about $37 million on a $443 million cash investment or an 8.3% leveraged return. Not only that, but it is an incredibly tax inefficient way of utilizing the tax losses.

These guys could have bought CNQ and would likely do a lot better and gone through less headaches than dealing with jurisdictional headaches like the ones they’re entering in now!

Follow-through soap opera

Over the past half year, a Saudi-run capital corporation, Mithaq Capital, has acquired 19.9% of the common stock. Understandably they’re not happy with how present board management has handled the investment portfolio.

Aimia is holding their annual general meeting on April 18.

Mithaq released on April 6:

Mithaq is disappointed with recent events and has lost confidence in the Board and management. Mithaq believes that it would be in the best interests of Aimia to reconstitute the board and will vote against the re-election of David Rosenkrantz (Chair), Philip Mittleman , Michael Lehmann , Karen Basian , Kristen M. Dickey , Linda S. Habgood , Jon Mattson and Jordan G. Teramo to the Board at the Meeting.

The reasons underlying Mithaq’s decision to vote against the re-election of the Board include concerns previously raised with Aimia regarding capital allocation decisions relating to acquisitions.

Aimia management quickly rebuked and claimed it is taking action to “protect the integrity of the market”:

Over the past month, Aimia has been investigating the misuse of confidential information belonging to the Company and one of its affiliates. The misuse involved an insider who was a former member of the Company’s board of directors and a senior officer of the affiliate in breach of his legal obligations. The investigation also uncovered what Aimia believes to be undisclosed joint actor conduct relating to the acquisition and voting of Aimia securities.

Upon uncovering this misconduct, Aimia’s affiliate recently terminated the insider and Aimia reported its concerns about breaches of securities legislation to the relevant securities regulatory authority. The Company is considering all legal options available to it to protect shareholders and the integrity of the market.

Mithaq filed an official proxy statement on SEDAR (April 10, 2023) and there are many gems in there, but this one in particular was interesting:

Aimia’s current operating expense at the head office level is at an approximate C$15 million annual run rate, which is a grossly inappropriate set-up for an investment holding company of Aimia’s size. In addition to this, by bringing Paladin into the recently announced acquisitions, Aimia shareholders will be paying a 2% annual management fee and a 20% performance fee.

This makes the old corporate headquarters at the former Pinetree Capital (pre-2016, the current entity is parsimoniously run) look spartan by comparison.

Aimia on April 11:

Mithaq and its joint actors seek to control Aimia out of self interest

…

Aimia believes that these statements were made in furtherance of a self-interested attempt by Mithaq and its joint actors to acquire control of Aimia’s cash for the purpose of investing in the securities of poorly performing public companies held by Mithaq.

Of course there’s self-interest! They own 19.9% of the company. It indeed is quite ironic that one of the poorly performing public companies held by Mithaq is Aimia itself!

I am sure there will be more theatrics between now and the April 18th AGM. I do not expect a sane shareholder would vote in the incumbent board, but some shareholder votes in the past have surprised me!

In terms of how Aimia’s stock is doing, their preferred shares are trading at roughly a 9.5% reset yield. Definitely not enough compensation for risk in my books.

Also, if Mithaq is successful in taking over Aimia’s board, they have the unenviable task to undo the capital damage that has occurred. Basically they’d be taking over when the family silverware has already been ransacked.

Aimia – not at this time

It’s been quite some time (four years) since I’ve written about Aimia (TSX: AIM).

The corporation is much ‘cleaner’ than it was when they were operating Aeroplan and especially now that they’ve sold their last loyalty program (PLM) they are sitting on a bunch of cash and assets. The PLM sale netted about $537 million, and by virtue of significant operating and capital losses in the past, the tax hit on this transaction will be relatively low. They still have a tax shield going forward and one of their stated intentions is to use their newly found half-billion dollars for investments to chip away at their tax shield.

From the June 30, 2022 balance sheet, they have a bunch of investments in income-losing entities. It does not inspire much confidence about future speculations.

Writing off the entirety of their investment portfolio, this leaves them with about $550 million to play with on 92 million shares outstanding, or about $6/share. There is no material liabilities or debt on the sheets. However, they do have $236 million in perpetual preferred shares outstanding which sucks out nearly $13 million/year out of the company, plus an even nastier Part VI.1 tax for another $5.1 million (hint to Aimia management – you perhaps might wish to NCIB the preferred shares). The rate resets are due in March 2024 and 2025, which would be at rates significantly higher than what they are paying now.

We know through public filings that they bought back 7.13 million common shares for $31.45 million in July and August. In a few days we will know about their September buybacks. The ending balance for August would be 85 million shares outstanding and approximately $510 million cash on the balance sheet, minus whatever else they threw money at in the interim.

Practically speaking, Aimia is trading at a price that is close to its cash balance, and assuming the remainder of its investment portfolio is worthless.

You would think that they should be able to convert half a billion dollars into something that earns a positive return. The Divestor Oil and Gas Index would be one avenue.

I tend to shy away from these “sum of the parts” entities because the incentives are generally misaligned for minority shareholders to make a proper return. Aberdeen International (TSX: AAB) was a poster child for this.

Aimia is controlled by Mittleman Investment Management, although they do not own a dominating stake in the company (approximately 10 million shares held between the company and the two brothers). Since Aimia does not have a common stock dividend, returns would be through capital appreciation. This typically would be driven by a share buyback, but as clearly evidenced by July and August’s trading action, the market has been more than happy to part ways with its shares at an average of $4.41.

The preferred shares are also not trading at a level that I would consider sufficient compensation (roughly 7% current yields and illiquid) given the overall situation.

Given the stress we are seeing in the market, even if there was a dump of liquidity on Aimia, I would find it probable that there would be some other part of the market that has a viable operating entity to be trading at equally or better levels at such a time. The fixed income component of it, however, I will continue keeping on eye on.

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!