March 11, 2012 - 11:06pm EST by
2012 2013
Price: 10.60 EPS $0.00 $0.00
Shares Out. (in M): 33 P/E 0.0x 0.0x
Market Cap (in $M): 344 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0.0x 0.0x

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  • Arbitrage
  • Liquidation


Low risk liquidation play with an estimated 14% to 20% IRR.


Long ACE Aviation (TSX: ACE.A or ACE.B) and short 0.9546 Air Canada shares (TSX: AC.A or AC.B) to earn the difference between the current market price of $10.60 and the liquidation value (current NAV of $11.72).


ACE Aviation (“ACE”) is a holding company listed on the Toronto Stock Exchange.  ACE was formed out of the reorganization of Air Canada in 2004 and formerly held stakes in numerous operating businesses such as Aeroplan, Jazz Air, Air Canada and ACTS.  Over the past few years, ACE divested all of these holdings and sold down most of its Air Canada stake.  Currently, ACE’s principal assets are $356mm in cash and an 11.1% equity interest in Air Canada.

For a more in-depth background, you can view past VIC write-ups on ACE from 2006 ( ) and 2004 ( ).  However, these theses focused on spin-offs of subsidiary companies and post re-org equity re-rating, respectively.  My thesis focuses on the liquidation.

On February 10 2012, the ACE Board announced its intention to seek shareholder approval to wind up and distribute its assets to shareholders.  The wind-up is contingent upon a shareholder vote, which is taking place on April 25 2012 (record date of March 6 2012).  If the vote is successful, ACE intends to make two liquidating distributions:

  1. Initial distribution of $250mm to $300mm cash within weeks of the shareholder meeting. 
  2. Final distribution of remaining assets ($80mm to $130mm in value) in mid 2013. 


As at December 31 2011, ACE had $356mm cash, 31mm class B shares of Air Canada, additional Air Canada warrants and a tax liability of $5mm.  Also, ACE has substantial tax pools, including $91mm in net operating losses and $340mm in capital losses.  I have ascribed no value to these tax assets in my analysis.

  Value ($mm) Amount (mm) NAV / Share % NAV Hedge
Cash $356.0   $10.96 93.5%  
AC Common Shares $29.5 31.00 $0.91 7.7% 0.9546
AC Warrants @ $1.44 $0.2 1.25 $0.00 0.0%  
AC Warrants @ $1.51 $0.1 1.25 $0.00 0.0%  
Tax Payable -$5.0   -$0.15 -1.3%  
NAV $380.7   $11.72    
Current Market Cap $344.2   $10.60    
Discount to NAV     9.6%    
Discount to Net Cash     1.9%    

ACE has a current NAV of $11.72 per share and net cash of $10.81 per share.  It is trading at a 9.6% discount to NAV and a 1.9% discount to net cash.

    Cash Flows   Expenses Net Distribution
    11-Mar-12 15-May-12 30-Jun-13   ($mm) Per Share
IRR - High 19.8% ($10.60) $8.47 $3.04   $7.0 $11.51
IRR - Low 14.0% ($10.60) $7.70 $3.66   $12.0 $11.35

The above table shows a high and low case regarding the expected initial and final distributions. 

The high case assumes a $275mm initial distribution (mid-point of $250mm to $300mm guidance) in May 2012 and the residual distribution in June 2013.  The high case assumes expenses up until liquidation of $7mm, as stated by the company in the Q4 2011 MD&A. The high case ascribes no value to the tax assets and ignores interest income from the cash. The company is currently earning ~$3.5mm in annual interest payments from the 1.02% average interest rate on its cash.  Note that this will decrease substantially after the initial cash distribution expected in May.  The high case results in a 20% IRR.

The low case assumes initial distribution of $250mm (low end of guidance) and guesstimates additional value leakage of $5mm, or $0.16 per share.  This leakage is used to account for higher than expected liquidation fees and additional unexpected taxes over and above any potential value for tax assets.  This also assumes no interest income or value for the tax assets.  The low case results in a 14% IRR.

My analysis assumes one is hedged on the Air Canada exposure and therefore I have no opinion on that stock.  That being said, if one was interested in buying AC.A shares, buying ACE.A instead would allow you to get AC.A for free.

Capital Structure

Due to foreign ownership restrictions, non-Canadian investors can only own 25% of the voting rights of ACE.  To implement this restriction, ACE adopted a dual share class structure.  Class A shares are for non-Canadian investors.  Due to the fact that many more non-Canadian own the stock than Canadians, the A shares have proliferated and their voting power per share has decreased substantially.  At this point, each class A share only has 0.34 votes per share, while each class B share has 2.82 votes per share.  Given that the record date for the vote on liquidation was on March 6, voting rights are now a moot point if you are looking to purchase shares.  Investors can buy either class of shares, then they will get flipped into whichever class necessary depending on domicile (ie. Offshore investor buys B shares and then flips them for A shares).  The A's are more liquid.

Why Is It Mispriced?

ACE used to be a well-followed name, with plenty of capital markets attention.  However, only one sell-side analyst now actively covers the name (and does quite a poor job in my opinion).

Many traditional investors lost interest once the company began shedding a good chunk of its operating businesses.  The company has not had an operating business in a quite a few years.  At this point, it is currently in liquidation mode, and as such it is getting kicked out of equity indices.  For example, ACE.A was deleted from the MSCI Canada Small Cap Index on February 29 2012.  On that day, the A shares traded 1.44mm shares, vs average annual volume of 50,232 shares and dropped $0.22 under heavy selling pressure.

Another reason this stock is mispriced is due to the tax issues.  Since the distributions will be treated as deemed dividends, U.S. shareholders will be stuck with a 15% withholding tax and other taxable Canadian investors will take a tax hit.  This 15% tax currently makes the liquidation uneconomic, and those affected by this should sell to the unaffected in a tax arbitrage.  However, U.S.holders can get around this with a swap through your broker.  The swap fees will of course lower your IRR.


Holder Source Amount Class Held Votes / Share % Total % Votes
Fidelity Sept 30 2011 AMR 1,395,300 B 2.82 4.3% 12.1%
Polar Mar 30 201  Circular 4,431,267 A 0.34 13.6% 4.6%
Marathon Feb 29 2012 AMR 3,442,789 A 0.34 10.6% 3.6%
  Feb 29 2012 AMR 113,364 B 2.82 0.3% 1.0%
West Face Mar 30 2011 Circular 3,800,500 A 0.34 11.7% 4.0%
    894,048 B 2.82 2.8% 7.8%
Total Held   14,077,268     43.3% 33.1%
Float   18,397,732     56.7% 66.9%
Total A & B Shares Outstanding 32,475,000        
  • Dilutive Air Canada share offering - We are unsure of what ACE will do with its Air Canada shares and warrants.  Ideally these would be distributed to shareholders.  One risk would be if ACE decided to liquidate these shares and warrants in a secondary offering at a large discount to market price. 
  • Additional tax liabilities or other claims - In March 2010, ACE applied for Certificates of Discharge from the Canada Revenue Agency and Revenue Québec. The audits of taxes are now "substantially complete" and ACE has accrued $4mm expected to be charged in Q1 2012.  The company has been subject to GST and QST reassessments in the past, receiving four notices since 2010.  However, the bulk of these charges were recouped from its former subsidiaries.  There is a risk of unforeseen tax reassessments or claims.
  • Timing of distributions – The final distribution is contingent upon the settlement of the company’s remaining liabilities (such as the tax liabilities).  If liquidating distributions are delayed, then the IRR is reduced.
  • Unsuccessful vote – In December 2008, ACE proposed a vote to liquidate.  At the time, dissident shareholder West Face Capital was in the midst of a proxy fight and publicly stated its opposition to the 2008 liquidation plan, stating “a liquidation of ACE Aviation's assets in the manner proposed by ACE is not in ACE's best interests and that there are alternatives that would better maximize value for the company and its shareholders.”  ACE then scrapped the plan in early 2009 and granted board representation to the dissident shareholder.  Fast forward to today - Given that the board announced its decision to seek shareholder approval, and the shareholder that opposed the last liquidation plan is currently on the Board, it would be logical that they support the current liquidation plan.  At the end of the day, it makes sense at this point to wind this company up, as there isn’t much more value to maximize given that over 92% of the company’s assets is cash.


Uneconomic selling due to index deletion and withholding tax issues has created an opportunity in a low risk liquidation play with an estimated 14% to 20% IRR by going long ACE.A or ACE.B (depending on domicile) and short 0.9546 AC.A or AC.B.



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