|Price:||18.75||EPS||see below||see below|
|Shares Out. (in M):||173||P/E||see below||see below|
|Market Cap (in $M):||3,235||P/FCF||see below||see below|
|Net Debt (in $M):||630||EBIT||0||0|
|TEV (in $M):||3,591||TEV/EBIT||see below||see below|
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Over the past few years, Aimia has grown solidly outside of Canada, but billings growth within Canada have started to stall out as the credit card market has become more competitive. The "value" credit card companies have paid customers for loyalty has steadily increased over time and Aimia’s current contract with CIBC, which expires at the end of 2013, is under market, and as a result, Aimia has been unable to respond to the competition and has lost market share.
Earlier this year, Aimia began negotiations with CIBC to renew its agreement. Its hope was to renew at a higher rate and pass along the extra money to consumers by changing the redemption rates for flights. However, by the middle of the year, negotiations with CIBC broke down and Aimia was forced to start discussions with other banks, including TD, to replace CIBC as its financial partner. In late June, Aimia announced a 10-year agreement with TD to replace CIBC at a more than 15% higher rate. As part of the deal, TD agreed to pay Aimia $100MM to help with the transition and guaranteed a minimum level of billings for the next three years. Simultaneously, Aimia announced a major re-investment in its Aeroplan program and improved redemption rates for consumers by 20-50%, which effectively passes on all the extra money from TD to its members. Management hopes that volume growth will be re-invigorated next year as it steals back market share from its peers. As shown in the chart below, Aeroplan members can now accumulate miles and redeem for flights much faster than members at competing programs like RBC Avion and CIBC Aventura.
Average Time it Takes to Get to Departure (Aimia vs. peers)
Despite a new contract with TD at a much higher rate, many investors were worried about what would happen when Aimia transitioned to TD. Because both TD and CIBC would have to issue new cards, customers would be forced to make a choice. In my view, customers would be much more loyal to the Aeroplan currency than to the issuing bank. Northwest Airlines went through a similar bank transition and 90% of its customers migrated in the first 90 days to the new bank. Aeroplan members are also highly engaged, which was a clear sign to me that they are very loyal to the currency. For example, 85% of members collect more Aeroplan miles than any other currency and 81% of members engage with Aeroplan communications >1 per month. Furthermore, according to management, 60-70% of Aeroplan card holders did not have any other products with CIBC.
In addition to low transition risk, there was still a chance that CIBC would exercise its right of first refusal and renew with Aimia. CIBC had 5-15% of its earnings at-risk and was under pressure from shareholders to reach a deal. Not surprisingly, in early August, CIBC used its right of first refusal to re-open discussions with Aimia and TD. By mid-September, Aimia agreed to a three-way deal with TD and CIBC. CIBC will keep half of its credit card portfolio and sell the other half to TD. TD will become the primary issuer of Aeroplan cards, but CIBC will retain customers with several other CIBC products. Importantly for Aimia, both banks agreed to pay a higher rate. Overall, this new deal is a win-win for Aimia because it eliminates transition risk next year and provides Aimia with two strong financial partners. Aimia will still receive $100 million from TD next year to help fund the Aeroplan program changes, but agreed to pay $150 million to CIBC this year to get the deal done. Its rationale was that a deal that included CIBC eliminates transition and litigation risk and also reduces the marketing spend that a potential transition would have required.
Below is a summary of my model. Let me know if you have questions about specific assumptions like burn/earn, cost per mile, price per mile, billings growth by geography/partner, etc. and I will post them in the comments section.
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