|Shares Out. (in M):||152||P/E||0||0|
|Market Cap (in $M):||518||P/FCF||0||0|
|Net Debt (in $M):||-360||EBIT||0||0|
While Aimia has previously been written up three times on VIC (hkup881’s write-up in 2017, mpk391’s in 2016, and Ragnar0307’s in 2013), the story today is much simpler and more certain than it ever has been before. Having agreed to sell Aeroplan to Air Canada for C$450mm, Aimia has significantly reduced risk and uncertainty and is now a holding company consisting of a stake in PLM, its ILS business, a considerable net cash and NOL position, and 3 minority stakes. We believe Aimia is conservatively worth C$5.59, representing a 73% upside from yesterday’s close of C$3.23. In a downside scenario, we believe Aimia is worth C$4.00, and, thus, we believe this is a situation where it is hard to lose money while providing very compelling upside.
A lot has happened since the last VIC write-up, so we layed out a condensed timeline here:
May 11, 2017 - Air Canada announced it would not renew its commercial agreement with Aeroplan and would, instead, launch its own loyalty program, sending the stock down 63%
June 2017 - Aimia’s CFO leaves, Aimia cuts the dividend on all common and preferred shares, and 3 board members resign
August 25, 2017 - Aimia sells Air Miles Trademarks for C$53.75 million and a contingent payment of C$13.75 million
February 1, 2018 - Aimia sells Nectar for C$105 million in gross proceeds (given cash transfers to Sainsbury to cover Nectar liabilities, Aimia essentially paid Sainsbury to take Nectar)
March 26, 2018 - Mittleman Brothers, LLC adds two members to the board and enters a standstill with Aimia
May 8, 2018 - Aimia announces the appointment of Jeremy Rabe, one of the Mittleman board members, as CEO
July 25, 2018 - Aimia receives an offer from Air Canada to purchase Aeroplan for C$250 million
July 26, 2018 - Aimia rejects a US$180 million offer from Aeromexico to acquire Aimia’s PLM stake
August 21, 2018 - Aimia and Air Canada reach an agreement in principle for Aeroplan to be purchased for C$450 million
November 26, 2018 - Aimia and Air Canada enter into a definitive agreement whereby Air Canada will purchase Aeroplan for C$450 million, expected to close in 1Q19
It is obvious to us that Aimia has made some poor deals in the past and was out-maneuvered by Air Canada; however, with a new CEO and Mittleman on the board, we believe Aimia has learned from its mistakes and will be more scrupulous in future deals.
We see two likely outcomes going forward for Aimia:
Aimia winds down by liquidating its minority holdings, shutting down its ILS business, and distributing all excess capital so that it is effectively a holding company of its PLM stake-this effectively turns into a long term liquidation, with Aimia waiting out AeroMexico to make a more reasonable offer for PLM (which we believe they will eventually)
Aimia sells the remainder of its assets as in scenario 1 but then reinvests the capital so that it can monetize its NOLs
We believe both outcomes will cause the discount to NAV to narrow substantially but believe Mittleman, who has 2 board seats now, could want to to play for the bigger gross return of effectively investing using the tax shield.
Aimia NAV Scenarios:
In our upside case, we assume Cardlytics can be sold at current market value, Fractal Analytics sold at 6x sales, BIG Digital sold at ~C$20 per member, C$50 million of Canadian NOL, and PLM valued at 12x EBITDA. The PLM valuation is rich given what is happening in Brazil and where Aeroplan transacted; however, given the long-dated nature of the contract (expires in 2030) and the earnings power of the business, we feel this is a suitable upside case multiple.
In our base case, we again assume Cardlytics can be sold at current market value, Fractal Analytics and BIG Digital sold at half the upside valuations, no NOL value, and PLM valued at 9x EBITDA. PLM is a growing asset in a relatively under-penetrated market, and we believe Aimia is in a stronger negotiating position than Brazilian peers or than it was in its Aeroplan sale.
In our downside case, we again assume Cardlytics can be sold at current market value, Fractal Analytics and BIG Digital have no value, no NOL value, and PLM valued at the price Aeromexico bid (US$180 million). Despite fairly draconian assumptions, we still see 24% upside to NAV.
Given that close to half of the current NAV is cash, the market is currently pricing in a deal-break with Air Canada, an inability to get the same offer from Aeromexico for PLM that it received this summer, and no value for Aimia’s minority stakes. We believe all 3 of those assumptions are wrong.
Why does this opportunity exist?
The Aeroplan deal with Air Canada has yet to close. We think there is a very high likelihood of the deal closing, but it is not a done deal yet.
The market likely remains skeptical of the board’s ability to get fair value for their assets given how they sold Nectar and Aeroplan much too cheap.
Mittleman has provided adult supervision, and we believe they will negotiate hard on behalf of equity holders.
Technicals/beta: The Russell 2000 is down 8% since the definitive agreement with Air Canada was signed (Aimia is down 14%)
This is a small, funky asset in Canada that has burned a lot of investors historically
Investors who played this for the option value of getting a deal done (and may have doubled their investment) may be trying to protect the gains they made in a tough market
New investors may see this as having appreciated a lot from March lows and may think they have missed the trade
Club Premier (“PLM”), the leading coalition program in Mexico, has around 5.6 million members and over 100 partners, and the exclusive operator of the frequent flyer program of Aeromexico, Mexico’s largest domestic airline and 2nd largest carrier in the Mexico-US cross border market. A member of SkyTeam, Club Premier members can earn and redeem points on airlines such as Delta Airlines and Air France-KLM. Members also earn points for using the American Express and Santander co-branded cards on a variety of services from other loyalty partners. Other partners of the Club Premier program include Soriana, Mexico’s second largest grocer, and Cabify, Mexico’s second largest car sharing service. For the year ended December 31, 2017, Club Premier reported Gross Billings of C$290 million.
Aimia initially purchased 28.855% of PLM in 2010 for US$34 million and in 2012 purchased an additional 20% of PLM for US$88 million (US$518 million valuation) for a total of US$124 million invested.
PLM is currently quite underpenetrated in Mexico, with only 4.5% of the population enrolled. While dated, this chart does a great job showing the opportunity for PLM:
Value of PLM if owned through contract expiry:
While we do not drive our PLM value off of this DCF, we wanted to illustrate how with a high quality, under penetrated asset like PLM, the NPV of the locked in and growing cash flows is very high even assuming Aeromexico attempts to take the business back at a low multiple in 2030 (when contract expires). We assume Aeromexico buys it from Aimia at 4x EBITDA in 2030, and in that scenario it is still worth $485mm today (which is approximately a 1 turn premium to what we assume in our base case).