AIMIA INC AIM.
August 27, 2017 - 10:29am EST by
hkup881
2017 2018
Price: 1.84 EPS 1.25 0
Shares Out. (in M): 152 P/E 1.5 0
Market Cap (in $M): 280 P/FCF 1.5 0
Net Debt (in $M): -168 EBIT 0 0
TEV ($): 112 TEV/EBIT .5 0

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  • Sum Of The Parts (SOTP)
  • Screamer
  • mission accomplished
  • activist required
  • Blue Chip Stamps Comp
  • They should be fired immediately
  • winner
 

Description

 

Due to a focus on scary sounding headline news, instead of analyzing the actual facts, there is a growing business that currently trades at 1.5x cash flow with net cash on the balance sheet. Of course, at this sort of valuation, it comes with some uncertainty, but it is mainly misconceptions about the future that lead to the current valuation. I intend to clear up those misconceptions and then talk about what I think fair value ought to be.

 

Of course, I’m talking about Aimia (AIM – Canada) owner and operator of various loyalty programs including Aeroplan, which has been discussed extensively on the message boards and written up by Ragnar0307 and mpk391. I thought a whole new write-up that puts all the facts from the message boards in one place was needed. In particular, I intend to focus this piece on the misconceptions related to the Air Canada agreement ending, which have led the shares to decline by 80% from already undervalued levels. I think there’s a pretty good chance that the shares are worth many times today’s quote and not much chance that an investment can lead to any permanent loss of capital, as you’re buying into the company at about 40% of the value of the balance sheet EXCLUDING Aeroplan and the International Coalitions. Furthermore, the net cash position along with rapidly growing cash balances will add further protection to any investment in Aimia.

 

 

 

Misconception 1- There will be a “run on the bank” due to card holders cashing in their $2.2b deferred redemption liability.

 

Reality- this liability should be thought of as “float” like at an insurance company. This float is the difference between points issued and points redeemed and is a natural part of any loyalty program due to the time it takes for card holders to earn enough points to redeem for what they want (many card holders never redeem). This float revolves over roughly a 2 year window (based on management guidance that the average card holder redeems once every 2 years.

 

While the numbers aren’t precise due to a weighting towards frequent fliers, let’s assume that roughly 60% of the total deferred liability is revolving (0 months to 24 months vintage), based on 45% of deferred revenue being current portion and 55% being long-term deferred. This would mean that $1.3 billion is “short term float.”

 

The $900 million of remaining liability should be thought of as an IBNR reserve. Some will be realized over time, but much of it is created through conservative accounting in order to defer taxable income (almost indefinitely).

 

If there were to be a “run on the bank” it would have happened during Q2 after the news that Aeroplan was breaking with Air Canada. Instead, there was a $9 million total increase in redemptions and by the end of the quarter, redemption rates had normalized to be in line with previous quarters (Q2 corporate presentation page 35). This is due to many reasons, but principally because card owners redeem points to get certain items that they want (usually travel). They don’t simply redeem to get gift certificates when they don’t have enough points for what they want. Human nature is based on saving up to reach a goal. Even card holders who have sufficient points, will not redeem in a hurry as they do not know their near-term travel plans. Q2’s redemption levels have proven this beyond a doubt. There will be another small increase in redemptions in early 2020 when the relationship with Air Canada terminates, but I believe that will be a similar non-event in the overall scheme of things and by then, AIM will have signed on additional redemption partnerships along with having a whole lot more liquidity to fund any redemption costs—due to retained earnings.

 

 

 

Misconception 2- The business will die in 2020 when the Air Canada relationship ends.

 

Reality- loyalty programs do not simply end. They sometimes trail off over many years, but this is only due to gross mismanagement. In 2020, when the relationship with Air Canada ends, all that will end is about $250 million in billings from Air Canada and preferred redemption pricing on Air Canada flights.

 

If Aeroplan were dying, you wouldn’t have a 1.0% increase in miles accumulated, a 3% increase in overall spend and a continued increase in the number of cardholders over the prior year. In fact, Aeroplan is CURRENTLY GROWING. It is hard to say exactly what will happen after 2020, but it seems likely that the program will continue to diversify redemption options while offering card holders the ability to redeem on Air Canada  

 

 

 

Misconception 3- In order to maintain its active users, Aeroplan will have to pay between $150 million and $250 million in added costs (based on a number of research analyst reports) to Air Canada in order to continue buying seats at current discounted prices.

 

Reality- Point devaluation is part of the life cycle of a loyalty program. If a flight from city A to B costs 45,000 points today, and it costs 50,000 points in 2021, will anyone notice the difference? I have frequent flier points through quite a few airline alliances. I do not know how much it costs to go from one place to another. I just know that every so often, I cash in my frequent flier points for a free flight. I use however many points it takes to get me where I need to go. If Aeroplan card holders were financially sophisticated, they would be using a credit card with cash back in the first place. The fact that they agree to receive these Aeroplan points, means that they’re already not that focused on the absolute value that they can earn with their spending, and instead treat points as a gift that can be spent haphazardly.

 

At the same time, with hundreds of millions of dollars in spending power, I have to assume that Aeroplan will be able to drive attractive bargains to buy seats in bulk from whatever airlines it partners with, including likely purchasing seats from Air Canada. Additionally, while Air Canada is experiencing strong yield factors today, the history of airlines tends to show that airlines are terrible businesses and current yield factors are not sustainable—meaning that by 2020, Air Canada may actually become quite desperate for the 1.9 million flight rewards that Aeroplan granted in 2016.

 

 

 

Misconception 4- Air Canada will steal all of Aeroplan’s customers

 

Reality- Having tried to grow a credit card loyalty program through a company I was involved with, I can tell you emphatically that it is easy to get people to sign up for a new card—it is nearly impossible to get them to actually put the new card in the “front of wallet” position for spending. The average Aeroplan customer has been with the program for 10 years. Their default credit card for all online and recurring purchases is Aeroplan. It’s inconvenient to earn points through 2 programs as it is harder to ever earn enough to get rewards. No one wants to leave stranded rewards when switching cards and there are inconveniences in switching cards. Therefore, it’s likely that a sizable percentage of customers stay with Aeroplan. That’s not to say that there won’t be defections to Air Canada (there will be). It is just that the defections won’t be enough to matter at today’s valuation level.

 

 

 

Misconception 5- The banks will cancel their relationships with Aeroplan

 

Reality- Aeroplan represents 9% of all Canadian credit card purchases and Aeroplan customers tend to be more affluent, hence more profitable for the banks. The banks spent hundreds or even thousands of dollars per customer to acquire these customers (someone has to pay for those miles that are given away when you get a new credit card). These customers are highly profitable for the banks. Most importantly, if the banks were to cancel the relationship with Aeroplan and move these customers to some other loyalty program, the banks would then become liable for the deferred liability to their customers when they cancel the Aeroplan points. Do the banks want to pay twice for the points they’ve issued? Think of the lawsuits if they refuse to issue new points? The banks are going nowhere.

 

 

 

General notes on loyalty programs

 

- A loyalty program generally uses Ponzi math where money comes in as a deferred liability but tends to come back out much more slowly. Due to tax treatment, this deferred liability becomes functional earnings and is often earned at very low rates of cash taxes. This creates lots of “float” that can be used to pay dividends, buy back shares or buy other loyalty programs. When the money does come out, if it ever comes out too fast, there will be point devaluations and gating to ensure that there is never a “run on the bank.”

 

-Due to the fact that much of this “float” is really income, and that taxes can be deferred indefinitely, cash flow is the best way to measure the success and value of a loyalty program.

 

- When loyalty programs decline, they don’t experience a Ponzi-like collapse. Instead, billings and redemptions decline at a roughly constant rate and the float is left to the owner of the loyalty program.

 

 

 

Valuation

 

Let’s start with the balance sheet. As of the end of Q2, there is $567m of cash and $450m of debt. (I’ll ignore the prefereds as they’re not paying cash dividends and are effectively perpetual equity). Therefore, you have $117 million in net cash. Now, add in the $51 million in proceeds, net of the highest estimated tax number, from the sale of Air miles and you have $168 million in net cash.

 

Now, add in the value of PLM, which is growing rapidly. At CDN $100 million in run-rate EBITDA, at a 10x multiple, PLM is worth $1 billion and AIM’s 48.9% stake is worth $489 million. Why is 10x EBITDA the right value? I have no idea, but what would you pay for a rapidly growing high ROIC business with negative working capital, massive tax advantages, that continues to dividend its excess “float” and income to you? If this were a publicly traded company, I think it would trade at well north of 10x EBITDA.

 

Other net working capital is basically zero (we’re ignoring the deferred points liability as it is basically recurring “float”), therefore, you get net book value of $657 million or $4.31 a share, of which approximately $1.10 is in cash (compared with today’s share price of $1.84). Based on this valuation, you get everything else (Aeroplan and International Coalitions), producing about $200 million in cash flow for free.

 

So what are Aeroplan and the international coalitions worth? I really have no idea. No one knows how much billings will decline by after the Air Canada program ends. No one knows how the International Coalitions will do, though they seem to slowly atrophy. All that I know for sure, is that with the shares at $1.84, unless these programs have a very large negative value (as in a huge redemption liability that becomes due in cash—even though that is almost impossible due to devaluations and gating), it almost doesn’t matter what these are worth, since you are getting the cash and PLM at about 40 cents on the dollar.

 

Management has guided to $220 million of cash flow in 2017 ($210 million after the sale of Air Miles). If you assume that they roughly hit this target for the next 3 years until the Air Canada relationship ends, you have $600 million of additional cash ($4.00 a share) before any accounting for $70 million in annual savings. Therefore, in 2020, I would expect there to be about $800 million in net cash ($168 million today + $600 million in cash flow over 3 years + whatever cash savings is created + savings in interest expense + added interest income from the rapidly increasing cash balances - one time severance and cost reduction expense). That is about $5.25 in cash!!! There will also be value from the stake in PLM, likely worth over $700 million in 2020, based on current growth rates or another $4.60 a share. In summary, as long as Aeroplan doesn’t detonate the company, you get to almost $10.00 in hard value (I’m ignoring the prefereds here as they’re perpetual equity with a low interest expense and no cash expense today).

 

Finally, on top of that $10.00 in value, you get whatever value the residual Aeroplan and international loyalty divisions will be worth. Even if you assume massive deterioration in those businesses, they should still be producing $100 million in cash flow + $70 million in corporate savings. Basically, they will still have a value greater than zero, potentially a whole lot greater than zero. Imagine the scenario above, but instead of $170 million in cash flow, Aeroplan can shift the redemption basket into higher margin items. Could cash flow be over $200 million? If Aeroplan is then growing at the rate of Canadian GDP (Aeroplan grew in Q2, which had the worst news flow that it could possibly deal with), is it crazy to value Aeroplan at 10x cash flow or $2 billion? Add in the $10 in hard book value and you could be looking at a valuation in the mid $20’s.

 

Furthermore, with $800 million in net cash when the Air Canada partnership ends in 2020, Aeroplan will be able to more than absorb any increase in redemptions during that year.  

 

Remember, those banks that everyone is worried about abandoning Aeroplan? They have huge investments in their cardholders through customer acquisition costs that need to be amortized over many years of card usage. They’ll do all that they can to make sure that Aeroplan survives and prospers so that Aeroplan cards remain “front of wallet.” These banks have their own relationships with potential redemption partners, they have the ability to give up on some of the economics of their credit cards in order to subsidize the redemption options. They have their own marketing budgets. Basically, what I’m saying is that Aeroplan isn’t on its own here. There are many groups who are incentivized to ensure that Aeroplan continues to chug along after 2020.

 

So, what makes the market realize all of this? I think you need one or two more quarters where redemptions are stable. I think news about new redemption options should be announced soon, which will also alleviate investor fears. Investors need to stop fearing a “run on the bank” and start focusing on the big picture. In summary, I don’t see why AIM isn’t a double-digit stock in a year or two. If Aeroplan doesn’t rapidly deteriorate, the shares could be trading a whole lot higher than that in 2021 when it becomes obvious that there is real residual value in the brand. With the bonds back at 97, clearly the debt holders have already figured out that the balance sheet risk is negligible here. Now the equity holders need to figure that out.

 

So, all that really needs to happen is people get over their fear of a “run on the bank.” As a certain percentage of people defect from Aeroplan and go to different programs, won’t they cash in their points leading up to 2020? Well, what happened to Blue Chip Stamps as people transitioned into credit card programs and the Ponzi math at Blue Chip went into reverse. Did Berkshire experience a “run on the bank” as more stamps were redeemed than issued? No. The float was used to purchase Wesco and the float was never claimed. There are still billions worth of Blue Chip stamps out there unclaimed, despite $25,920 in stamp issuance in 2006 (the last year that there is data outstanding). In effect, all that outstanding “float” really was earnings in the end—much like Aeroplan’s “float” is not going to get redeemed.

 

 

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

New redemption partner signing

Continued business growth without an increase in redemptions

8       sort by    

    Description

     

    Due to a focus on scary sounding headline news, instead of analyzing the actual facts, there is a growing business that currently trades at 1.5x cash flow with net cash on the balance sheet. Of course, at this sort of valuation, it comes with some uncertainty, but it is mainly misconceptions about the future that lead to the current valuation. I intend to clear up those misconceptions and then talk about what I think fair value ought to be.

     

    Of course, I’m talking about Aimia (AIM – Canada) owner and operator of various loyalty programs including Aeroplan, which has been discussed extensively on the message boards and written up by Ragnar0307 and mpk391. I thought a whole new write-up that puts all the facts from the message boards in one place was needed. In particular, I intend to focus this piece on the misconceptions related to the Air Canada agreement ending, which have led the shares to decline by 80% from already undervalued levels. I think there’s a pretty good chance that the shares are worth many times today’s quote and not much chance that an investment can lead to any permanent loss of capital, as you’re buying into the company at about 40% of the value of the balance sheet EXCLUDING Aeroplan and the International Coalitions. Furthermore, the net cash position along with rapidly growing cash balances will add further protection to any investment in Aimia.

     

     

     

    Misconception 1- There will be a “run on the bank” due to card holders cashing in their $2.2b deferred redemption liability.

     

    Reality- this liability should be thought of as “float” like at an insurance company. This float is the difference between points issued and points redeemed and is a natural part of any loyalty program due to the time it takes for card holders to earn enough points to redeem for what they want (many card holders never redeem). This float revolves over roughly a 2 year window (based on management guidance that the average card holder redeems once every 2 years.

     

    While the numbers aren’t precise due to a weighting towards frequent fliers, let’s assume that roughly 60% of the total deferred liability is revolving (0 months to 24 months vintage), based on 45% of deferred revenue being current portion and 55% being long-term deferred. This would mean that $1.3 billion is “short term float.”

     

    The $900 million of remaining liability should be thought of as an IBNR reserve. Some will be realized over time, but much of it is created through conservative accounting in order to defer taxable income (almost indefinitely).

     

    If there were to be a “run on the bank” it would have happened during Q2 after the news that Aeroplan was breaking with Air Canada. Instead, there was a $9 million total increase in redemptions and by the end of the quarter, redemption rates had normalized to be in line with previous quarters (Q2 corporate presentation page 35). This is due to many reasons, but principally because card owners redeem points to get certain items that they want (usually travel). They don’t simply redeem to get gift certificates when they don’t have enough points for what they want. Human nature is based on saving up to reach a goal. Even card holders who have sufficient points, will not redeem in a hurry as they do not know their near-term travel plans. Q2’s redemption levels have proven this beyond a doubt. There will be another small increase in redemptions in early 2020 when the relationship with Air Canada terminates, but I believe that will be a similar non-event in the overall scheme of things and by then, AIM will have signed on additional redemption partnerships along with having a whole lot more liquidity to fund any redemption costs—due to retained earnings.

     

     

     

    Misconception 2- The business will die in 2020 when the Air Canada relationship ends.

     

    Reality- loyalty programs do not simply end. They sometimes trail off over many years, but this is only due to gross mismanagement. In 2020, when the relationship with Air Canada ends, all that will end is about $250 million in billings from Air Canada and preferred redemption pricing on Air Canada flights.

     

    If Aeroplan were dying, you wouldn’t have a 1.0% increase in miles accumulated, a 3% increase in overall spend and a continued increase in the number of cardholders over the prior year. In fact, Aeroplan is CURRENTLY GROWING. It is hard to say exactly what will happen after 2020, but it seems likely that the program will continue to diversify redemption options while offering card holders the ability to redeem on Air Canada  

     

     

     

    Misconception 3- In order to maintain its active users, Aeroplan will have to pay between $150 million and $250 million in added costs (based on a number of research analyst reports) to Air Canada in order to continue buying seats at current discounted prices.

     

    Reality- Point devaluation is part of the life cycle of a loyalty program. If a flight from city A to B costs 45,000 points today, and it costs 50,000 points in 2021, will anyone notice the difference? I have frequent flier points through quite a few airline alliances. I do not know how much it costs to go from one place to another. I just know that every so often, I cash in my frequent flier points for a free flight. I use however many points it takes to get me where I need to go. If Aeroplan card holders were financially sophisticated, they would be using a credit card with cash back in the first place. The fact that they agree to receive these Aeroplan points, means that they’re already not that focused on the absolute value that they can earn with their spending, and instead treat points as a gift that can be spent haphazardly.

     

    At the same time, with hundreds of millions of dollars in spending power, I have to assume that Aeroplan will be able to drive attractive bargains to buy seats in bulk from whatever airlines it partners with, including likely purchasing seats from Air Canada. Additionally, while Air Canada is experiencing strong yield factors today, the history of airlines tends to show that airlines are terrible businesses and current yield factors are not sustainable—meaning that by 2020, Air Canada may actually become quite desperate for the 1.9 million flight rewards that Aeroplan granted in 2016.

     

     

     

    Misconception 4- Air Canada will steal all of Aeroplan’s customers

     

    Reality- Having tried to grow a credit card loyalty program through a company I was involved with, I can tell you emphatically that it is easy to get people to sign up for a new card—it is nearly impossible to get them to actually put the new card in the “front of wallet” position for spending. The average Aeroplan customer has been with the program for 10 years. Their default credit card for all online and recurring purchases is Aeroplan. It’s inconvenient to earn points through 2 programs as it is harder to ever earn enough to get rewards. No one wants to leave stranded rewards when switching cards and there are inconveniences in switching cards. Therefore, it’s likely that a sizable percentage of customers stay with Aeroplan. That’s not to say that there won’t be defections to Air Canada (there will be). It is just that the defections won’t be enough to matter at today’s valuation level.

     

     

     

    Misconception 5- The banks will cancel their relationships with Aeroplan

     

    Reality- Aeroplan represents 9% of all Canadian credit card purchases and Aeroplan customers tend to be more affluent, hence more profitable for the banks. The banks spent hundreds or even thousands of dollars per customer to acquire these customers (someone has to pay for those miles that are given away when you get a new credit card). These customers are highly profitable for the banks. Most importantly, if the banks were to cancel the relationship with Aeroplan and move these customers to some other loyalty program, the banks would then become liable for the deferred liability to their customers when they cancel the Aeroplan points. Do the banks want to pay twice for the points they’ve issued? Think of the lawsuits if they refuse to issue new points? The banks are going nowhere.

     

     

     

    General notes on loyalty programs

     

    - A loyalty program generally uses Ponzi math where money comes in as a deferred liability but tends to come back out much more slowly. Due to tax treatment, this deferred liability becomes functional earnings and is often earned at very low rates of cash taxes. This creates lots of “float” that can be used to pay dividends, buy back shares or buy other loyalty programs. When the money does come out, if it ever comes out too fast, there will be point devaluations and gating to ensure that there is never a “run on the bank.”

     

    -Due to the fact that much of this “float” is really income, and that taxes can be deferred indefinitely, cash flow is the best way to measure the success and value of a loyalty program.

     

    - When loyalty programs decline, they don’t experience a Ponzi-like collapse. Instead, billings and redemptions decline at a roughly constant rate and the float is left to the owner of the loyalty program.

     

     

     

    Valuation

     

    Let’s start with the balance sheet. As of the end of Q2, there is $567m of cash and $450m of debt. (I’ll ignore the prefereds as they’re not paying cash dividends and are effectively perpetual equity). Therefore, you have $117 million in net cash. Now, add in the $51 million in proceeds, net of the highest estimated tax number, from the sale of Air miles and you have $168 million in net cash.

     

    Now, add in the value of PLM, which is growing rapidly. At CDN $100 million in run-rate EBITDA, at a 10x multiple, PLM is worth $1 billion and AIM’s 48.9% stake is worth $489 million. Why is 10x EBITDA the right value? I have no idea, but what would you pay for a rapidly growing high ROIC business with negative working capital, massive tax advantages, that continues to dividend its excess “float” and income to you? If this were a publicly traded company, I think it would trade at well north of 10x EBITDA.

     

    Other net working capital is basically zero (we’re ignoring the deferred points liability as it is basically recurring “float”), therefore, you get net book value of $657 million or $4.31 a share, of which approximately $1.10 is in cash (compared with today’s share price of $1.84). Based on this valuation, you get everything else (Aeroplan and International Coalitions), producing about $200 million in cash flow for free.

     

    So what are Aeroplan and the international coalitions worth? I really have no idea. No one knows how much billings will decline by after the Air Canada program ends. No one knows how the International Coalitions will do, though they seem to slowly atrophy. All that I know for sure, is that with the shares at $1.84, unless these programs have a very large negative value (as in a huge redemption liability that becomes due in cash—even though that is almost impossible due to devaluations and gating), it almost doesn’t matter what these are worth, since you are getting the cash and PLM at about 40 cents on the dollar.

     

    Management has guided to $220 million of cash flow in 2017 ($210 million after the sale of Air Miles). If you assume that they roughly hit this target for the next 3 years until the Air Canada relationship ends, you have $600 million of additional cash ($4.00 a share) before any accounting for $70 million in annual savings. Therefore, in 2020, I would expect there to be about $800 million in net cash ($168 million today + $600 million in cash flow over 3 years + whatever cash savings is created + savings in interest expense + added interest income from the rapidly increasing cash balances - one time severance and cost reduction expense). That is about $5.25 in cash!!! There will also be value from the stake in PLM, likely worth over $700 million in 2020, based on current growth rates or another $4.60 a share. In summary, as long as Aeroplan doesn’t detonate the company, you get to almost $10.00 in hard value (I’m ignoring the prefereds here as they’re perpetual equity with a low interest expense and no cash expense today).

     

    Finally, on top of that $10.00 in value, you get whatever value the residual Aeroplan and international loyalty divisions will be worth. Even if you assume massive deterioration in those businesses, they should still be producing $100 million in cash flow + $70 million in corporate savings. Basically, they will still have a value greater than zero, potentially a whole lot greater than zero. Imagine the scenario above, but instead of $170 million in cash flow, Aeroplan can shift the redemption basket into higher margin items. Could cash flow be over $200 million? If Aeroplan is then growing at the rate of Canadian GDP (Aeroplan grew in Q2, which had the worst news flow that it could possibly deal with), is it crazy to value Aeroplan at 10x cash flow or $2 billion? Add in the $10 in hard book value and you could be looking at a valuation in the mid $20’s.

     

    Furthermore, with $800 million in net cash when the Air Canada partnership ends in 2020, Aeroplan will be able to more than absorb any increase in redemptions during that year.  

     

    Remember, those banks that everyone is worried about abandoning Aeroplan? They have huge investments in their cardholders through customer acquisition costs that need to be amortized over many years of card usage. They’ll do all that they can to make sure that Aeroplan survives and prospers so that Aeroplan cards remain “front of wallet.” These banks have their own relationships with potential redemption partners, they have the ability to give up on some of the economics of their credit cards in order to subsidize the redemption options. They have their own marketing budgets. Basically, what I’m saying is that Aeroplan isn’t on its own here. There are many groups who are incentivized to ensure that Aeroplan continues to chug along after 2020.

     

    So, what makes the market realize all of this? I think you need one or two more quarters where redemptions are stable. I think news about new redemption options should be announced soon, which will also alleviate investor fears. Investors need to stop fearing a “run on the bank” and start focusing on the big picture. In summary, I don’t see why AIM isn’t a double-digit stock in a year or two. If Aeroplan doesn’t rapidly deteriorate, the shares could be trading a whole lot higher than that in 2021 when it becomes obvious that there is real residual value in the brand. With the bonds back at 97, clearly the debt holders have already figured out that the balance sheet risk is negligible here. Now the equity holders need to figure that out.

     

    So, all that really needs to happen is people get over their fear of a “run on the bank.” As a certain percentage of people defect from Aeroplan and go to different programs, won’t they cash in their points leading up to 2020? Well, what happened to Blue Chip Stamps as people transitioned into credit card programs and the Ponzi math at Blue Chip went into reverse. Did Berkshire experience a “run on the bank” as more stamps were redeemed than issued? No. The float was used to purchase Wesco and the float was never claimed. There are still billions worth of Blue Chip stamps out there unclaimed, despite $25,920 in stamp issuance in 2006 (the last year that there is data outstanding). In effect, all that outstanding “float” really was earnings in the end—much like Aeroplan’s “float” is not going to get redeemed.

     

     

     

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    New redemption partner signing

    Continued business growth without an increase in redemptions

    Messages


    SubjectFascinating Situation
    Entry08/27/2017 04:50 PM
    MemberWeighingMachine

    thanks for an interesting write up. I'm very new to the story but have been trying to get up to speed today.  In Ragnar's initial write up of the company (2013) my understanding is that CIBC had moved away from Aimia (replaced by TD) which seems counter to the idea that the banks are tightly bound to these guys given their sunk acquisition costs and promises to card holders. Additionally, rather than devaluing points, in conjunction with picking up TD at a higher rate around 2013 due to a more competitive credit card rewards environment, Aimia was increasing spend to reduce the number of points required for air travel which seems contrary to the notion that you can basically do whatever you want to the end customers and they keep smiling and spending. 

    Lastly, to the extent that the cardholder does want to earn travel points in Canada, it seems Air Canada is irreplaceable given its 50% ish domestic market share. This would seem to suggest that a run on the bank toward the end of 2020 could be more likely than you suggest (toaster ovens or whatever)

     

     


    SubjectRe: Fascinating Situation
    Entry08/27/2017 09:08 PM
    Memberdd12

    with regard to the banks comment, here is the deal they did in 2013:

    On September 16, 2013, Aimia entered into ten-year financial credit card agreements with each of TD and CIBC, effective from January 1, 2014. Under these agreements TD became Aeroplan’s primary financial services partner and credit card issuer, while CIBC continues to be an issuer of Aeroplan credit cards. On September 16, 2013, Aimia also entered into an asset purchase agreement with TD and CIBC.  Pursuant to this agreement, TD acquired on December 27, 2013, approximately half of the Aeroplan credit card portfolio from CIBC and CIBC retained the balance, composed of Aeroplan cardholders who have broader banking relationships with CIBC. As a result, a payment of $150 million in relation to the sale of approximately half of the Aeroplan card portfolio to TD, was made by Aimia to CIBC. Concurrent with the asset purchase agreement, the parties entered into a migration agreement. Depending on the net migration of Aeroplan-branded credit card accounts between CIBC and TD over the first five years of the agreement (meaning the net amount of cardholders retained by CIBC who choose to move to TD and the cardholders purchased by TD who choose to move to CIBC), TD, Aimia and CIBC have agreed to make payments of up to $400 million. Aimia will be responsible for, or entitled to receive, up to $100 million of these payments over five years. In accordance with the migration agreement, annual payments relating to the net migration of the Aeroplan-branded credit card accounts are to be made within the first 45 days each year.

     

    here is how it has played out so far:

     

     

    2013

    2014

    2015

    2016

    Total Billings

    $2,366

    $2,687

    $2,469

    $2,340

    Percent of Billings

     

     

     

     

    TD

     

    2%

    19%

    16%

    18%

    CIBC

    23%

    10%

    11%

    11%

    Actual Billings

     

     

     

     

    TD

     

    $47

    $510

    $395

    $421

    CIBC

                        544

                        269

                        272

                        257

     

    Total

                        592

                        779

                        667

                        679

     

    Percent

    25%

    29%

    27%

    29%


    SubjectInsiders, Air Miles
    Entry08/28/2017 11:45 AM
    Memberxds68

    Given all the seeming risk mitigants here, I'm a little puzzled there hasn't been at least some insider buying for either the common or preferred. Of course this can be a function of numerous factors, but my sense is when these things are total no brainers at least one or two insiders buy in.

    On the Air Miles sale, they seemed to sell this at kind of a low price / high ROI to the buyer, based on the information they gave - although I'm not clear on the term and rev trajectory - and am assuming was all profit.


    Subjectthanks
    Entry08/29/2017 07:29 PM
    Memberaa123

    the interesting idea and great insights into the situation. a few questions. 

    1. you say that if a run on the bank would have started or occured we would have seen it in Q2. why is it so? members have 3 year to redeem so what's the rush to do it right away? Couldn't you see a situation where over the next 3 years billings will go down as people start switching cards and redemptions increase bc members know that they won't be able to use the points past 2020? So it's not clear to me why Q2 proves anything but maybe I am missing something. 

    2. How are you treating the prefered? Even if perpetual and no dividend (currently), it is still debt that a buyer would have to pay if they acquired the entire company. 

    3. You state: "Most importantly, if the banks were to cancel the relationship with Aeroplan and move these customers to some other loyalty program, the banks would then become liable for the deferred liability to their customers when they cancel the Aeroplan points." Where can I confirm this? 

    Thanks so much. 

     


    SubjectRe: thanks
    Entry08/29/2017 11:19 PM
    Memberhkup881

    aa123,

    On your questions

    1- People redeem when they're constantly reminded to redeem. The AC news was all over Canadian news during Q2 and many public commentators and TV personalities were telling people to redeem b/c their options were going to get worse. That was the big call to action, so to speak. In 2020 when the points actually expire, people will be thinking about other things and there won't be a massive 2 week blast of people talking about change in redemption options. Sure, redemptions will increase in the last few quarters going into 2020, but it will be a number that's in the millions and maybe tens of millions. I doubt redemptions increase beyond the $25-$50m range beyond trendline as there will be no real call to action--unless AC tries to force a "run on the bank." Even then, AC would have to spend a fortune on marketing and it's unlikely to target people spending their Aeroplan as that would create real legal issues for AC as AC will still be the partner in the program. AC is more likely to simply tout the benefits of their program. 

    2- I am ignoring the prefered at this point. I believe there is no change of control provision, so the buyer wouldn't ever have to pay it. It's just perpetual (and very cheap) equity, but since it is perpetual, it doesn't really go into the equity calculation. I think of it more like a ~$15m annual royalty that you may or may not ever need to pay in cash. By the time this is turned back on, the shares are either up many times from today's price, or splattered and I look like a fool. In either case, the pref is irrelevent to this thesis and at 1.5x cash flow and less than half of current book, you don't need big assumptions to have a nice upside on the common in the first place.

    3- Think about this logically. You are a customer with a CIBC Aeroplan CC and your bank tells you that you now have a CIBC platinum card. So you call CIBC and ask WTF happened to my Aeroplan points. Well, you still have them over at Aeroplan and you can spend them, but you don't have enough for a flight and you have no way to earn any more to get the flight. So your 2 options are leave those points stranded (which most people won't do) or stop spending on your CIBC platinum card and get a TD Aeroplan card so you can keep accumulating Aeroplan and you think the guys at CIBC are crooks for the bait & switch. This is why when a loyalty program changes, the bank either gives new points equal to the existing points (huge added expense of moving a program) or the banks don't move in the first place--think of how TD came in with the Aeroplan card for CIBC holders when they took over the card base. TD probably would have preferred their own redemption option, but it was impossible if they wanted to keep the cardholders. 

    Having seen this happen twice in practice, I can tell you that the bank bought tens of thousands of active users and didn't end up with any value b/c they stranded the points basket and the seller got cash up front for selling the cardholder base and then like 95% breakage on the points basket as well and then the cardholders all bolted and the buyer got nothing. In the other case, they were able to sell the cardholder base and then get most of the cardholders back through a different bank backed card in order to finish the accumulation/spend process (after which most cardholders stayed to continue the process) and effectively sold their cardholders to a bank and got almost all back through effective marketing. This was all a decade ago, but human nature doesn't change. However, the banks have gotten smarter (maybe) as you can see by how TD acquired the CIBC base and then paid AIM to help transition the cardholders.


    SubjectRe: me too
    Entry08/30/2017 12:02 AM
    Memberhkup881

    Theboss,

    on your questions, i'm in italics and bold. couldn't figure out how else to make it stand out

    nice summary!  I saw this on internal screens last month and it looks interesting.

    I need to do more work on the business as I'm a little worried this company is terminally disadvantaged like the Yellow Pages or a pager company given structural headwinds and has only historically generated single digit ROIC at best.  But I've been working on this all day. I’m bullish but less so than you as I calculate more real/cash liabilities.  Have a longer detailed response I will post soon but:

    It is indeed a structurally challenged business as Aeroplan is at market saturation as a % of the Canadian population and cannot really grow much faster than GDP. However, card options continue to grow more competitive and creative and the number of loyalty cards held by the average person also keeps growing which becomes overwhelming, which will put long term pressure on margins. Additionally, new payment options are rapidly coming to the mainstream and it seems rediculous to think that merchants will still be paying 100-300bps to credit card companies to finance loyalty programs at some stage in the future.

    However you don't need any heroic assumptions on this business to make a lot of money. If you just assume the loyalty programs are worth 5x cash flow until the market decides if this lives or not, and you add that to the $4 in book from cash and PLM, you get a 5-bagger from where I wrote it up. If it is worth 10x a smaller cash flow number when Aeroplan clearly survives, it's probably worth 10x what it was when I wrote it up.

     

    1. In all your per share analysis it looks like you're ignoring $322.5m of preferred which are accruing >$15m per year in deferred dividends.  These preferreds are a big piece of the cap structure oand getting bigger as they accrue.  Aren't these senior to equity and should be deducted from asset value before calculating per share equity value?  

    Since they are perpetual, I think it's better to think of them like a royalty or added SG&A cost or something. They shouldn't ever need to be redeemed ever and it will just be a drag on cash flow that isn't even a cash cost today. By the time these are turned on, the shares are either up many times or are a donut and I feel stupid.

     

     

    2.  I think I disagree that if there was going to be a “run on the bank” it would have happened in Q2.  I could very well be wrong here. I think the real risk of a bank run is not until 2020 and before then we won’t know if Aeroplan is going to unwind or not.  Another possibility is that card users won’t rush to redeem tomorrow but instead are saving up and once they redeem and fly to FL in January and use their miles that some large portion of them will stop using Aeroplan, putting AIM in a slow bleed situation which is a cash flow headwind.  I don’t think we will know this until at least 4-6 quarters or before 2021

    Redemptions will increase going forward but it will be a lot less than most people think and it will be much closer to 2020 than today, which lets AIM build up a much larger cash cushion to offset the increase in redemptions. People won't redeem during the 2017 winter and then stop using the card. Instead, they'll redeem on their normal schedule and keep using the card at least until 2019 and probably then, will keep using the card as it is the "front of wallet" and it is human nature to stick with "front of wallet"

    I would assume AIM can’t really onboard another competitor in the meantime because they still want the preferential terms with AC, they need to stay on good terms with AC, still have contractual miles purchase obligations and if AC miles are discounted more than AIM can replace them for, then AIM could not bring on competing offering at similar pricing onto the platform until after AC is gone.  So I assume AIM will find some group of airlines to replace AC relationship, announce it sometime in next 12 months, but then can’t/won’t roll it out until AC deal ends in 2020. 

    I think that is an accurate assumption. However, I suspect that AIM also onboards hotel/cruise/casino/etc. options much more quickly and at redemption pricing that looks even more attractive than AC. They probably couldn't do this earlier b/c they didn't want to offend AC in the negotiations, but now they have a free hand and these will be at much higher gross margins than an airline option.

    I think this creates the risk of a “bank run” in 2020 because if they put their new partner up on the Aeroplan platform when Air Canada is still on there people will compare and see the new Aeroplan is worse and then be motivated to use their miles now and leave the program.  If Aeroplan does not put a partner up on the platform before Air Canada is gone in 2020 then people will not know the terms and be motivated to use their miles and leave the program.  Perhaps Aeroplan can temporarily discount miles with new partner, eat some margin and manage this transition, but it could get really rough in 2020 and am not sure that will be a non event year.

    You are overthinking this. Card holders spend about a second each year thinking about their card redemption options and even then, they spend at an 80/20 ratio with "front of wallet" guiding the decision.

    I also assume AIM wants to get something lined up before the AMEX deal expires 12/2018 also though so puts AIM in a weak negotiating spot.

    AMEX cannot leave b/c they will have to eat the cost of the new miles they give out or they lose the card holders. See post 10 about this.

    If it were me though I wouldn't use all my miles right now, I'd just wait until I use them for whatever my next flight is and then just use a different card going forward.  Which of course is why this trades at 1.5x cash flow but still, I'm not sure AIM is "out of the woods" until 2021.

    It may take until 2021 to revalue fully, but it should at least be worth a multiple on cash flow that is higher than 1.5x. 99% of card holders have already forgotten about the AC/Aeroplan announcement. You are looking at this like an equity investor, instead of a cardholder with a billion other thoughts on his mind.

    As an anecdote, a buddy of mine works in wealth management at RBC. He has about 200 clients and was told to push the RBC card on his clients in the week after the AC announcement. He got a nice fat bonus for signing a bunch of his clients up for the RBC card by scaring them that their Aeroplan would be cancelled or whatever he told them. It is now 3 months later and you know what?? None are using the RBC card. He asked them why and they have silly answers "I like my Aeroplan better" "I am used to my Aeroplan" who knows the real reason. But not one client gave him a fact based reason related to milage value and relative redemption options or anything else. Front of wallet ALWAYS wins out.  

     

    3.  Do you have any case studies on what the implosion of a large loyalty program looks like?  I’m curious about billing/redemption decline rates especially.

    I see your point on the deferred mileage not being a “real” liability in some sense but I think there is a scenario where Aeroplan goes into a tailspin (which we won’t know if will happen until 2021) and AIM equity could become impaired.  If we get to 2021 and assume there is ~$1.5b liability on unredeemed miles and it takes 5 years to wind down that is -$300m per year cash use.  If this goes into a tailspin then other partners will leave and AIM will at best be generating $50m of fcf in 2021+ from non-aeroplan business (ME and UK) and at that point AIM would maybe have $300m in net liquid assets post tax.  I know this is a simplification and punitive and there would be some residual billings coming in but this is still an issue which could impair the equity.  In theory AIM could just suddenly devalue or gate their points at Aeroplan (which they wouldn't do until the run started) but wouldn’t AIM completely ruin their reputation globally if they did this and likely be unable to keep or get any partners in the future?  I can't imagine any bank anywhere on earth would want to be associated with that and AIM would not go down that road until the unwind was already underway. 

    These programs don't detonate. They slowly die, usually because the marketing spend behind them doesn't replace departing card holders. They NEVER have runs on the bank b/c that is simply impossible. You can ALWAYS gate or devalue. If Aeroplan devalues, the card holders will not feel it b/c they don't know that a flight that used to cost 40,000 now costs 45,000. When they gate, the card holders will not know about it b/c they just get a busy signal or are told there are no flights that day but they can book a flight for the week after (which isnt' when they want to travel). It's ALWAYS a soft gate or a soft devalue. There are tons of companies that advise loyalty programs on how to gate and devalue. This is now an actual science.

    The best analogy for a slow death is Blue Chip Stamps. It went from being so powerful and dominant that the US Govt went after them  for anti-trust in the 1960s. By the 1980s they had effectively disappeared. Were the billions in face value of outstanding stamps redeemed? Nope. Berkshire used the float and never had a run on the bank. If Aeroplan dies, it will be a slow 10-20 year death where card spend is ALWAYS larger than redemptions. Even if redemptions equal or exceed spend in certain periods, it won't matter in the longer term b/c you are coming into this at 40% of book and all that matters in making money here, is the fact that Aeroplan CANNOT have a negative value b/c it CANNOT have a run on the bank b/c if that ever happens, they will gate and devalue.

    Another case is Air Miles where they cancelled the older miles (huge mistake as it forces redemptions to increase) and redemptions were up 60% as the old miles were burned off. Even in such a crazy scenario, you're looking at like a $300-$400m increase in Aeroplan redemptions for a 1 year period and that is with you literally threatening to cancel the points and forcing people to spend on gift certificates and toaster ovens. A $300-$400m increase in spend won't kill Aeroplan if it happens in 2020 as they'll have more than enough liquidity at that point and hopefully AIM isn't stupid enough to create their own forced run on the bank. Even then, spend at Air Miles also increased as people rushed to earn enough points to redeem for what they wanted, so there was a spike in spend to offset redemptions and then card usage normalized after 2 quarters.

    I do not know of a single loyalty program that ever went kaplooey and detonated from a run on the bank as that is mathematically impossible. So as long as Aeroplan isn't worth negative value, there is no way for you to lose money on this investment--hence why I sized it so large.

     

     

    I haven’t found a good example of a large $1b+ one like Aeroplan unwinding yet so I’m afraid the concept of the deferred miles not being a real liability in practice is a bit untested.  I am still working on this.


    SubjectRe: Re: me too
    Entry08/30/2017 07:00 AM
    Memberdd12

    1)  I was struck by, actually shocked by, the Diversified Royalty presentation of acquisition of Air Miles.  they tried to kill their own program and that didn't even work.  the resiliency of these programs was stunning to me, see slides 8-9:  https://seekingalpha.com/article/4102401-diversified-royalty-bevff-acquire-air-miles-trademark-aimia-gapff-slideshow

    2)  At the risk of being flippant, i just don't see how hotels / casinos / cruises can't be a weapon here for AIM.  they have the same problem as the airlines (high fixed costs, low load/occupancy periods with high margin sales flow-through) ... i would think they could find suitable partners among this expansive group, which would reinforce to plan members that things are fine.  airline partner to come later.  again, i'm not saying that deals here are just simple layups, but i think it's pretty silly to think there aren't desirable partners beyond AC that are looking to increase throughput.


    SubjectRe: Re: Re: me too
    Entry08/30/2017 11:10 AM
    Memberaa123

    dd12 or anyone else - thanks for these slides. that said, doesn't this indicate 60% spike in redemption ahead of the deadline? as to your second comment, i understand your points but the question in my mind is how many of the people in the aimia plan are there for AC. My wife use an Amex Delta bc she wants a higher status on Delta and business class upgrades. If Amex replaced Delta with some cruises, she would switch card immediately. So beside the frequent fliers which Aimia exclude for some of their stats, I am curious how many non frequent fliers are still in the program for AC. Isn't that an important question? Appreciate any thoughts. Thanks. 


    SubjectRe: Re: Re: me too
    Entry08/30/2017 11:34 AM
    Memberhkup881

    During every election, some moron US politician talks about how the USA will default on its debt. The USA cannot default on its debt, as long as the debt is denominated in USD that the govt can print more of.

    The whole bear thesis on AIM is that AIM will have a "run on the bank." There CANNOT be a run on the bank, if AIM controls the redemption rules on the currency and can print more of it, gate and devalue it.

    Air Miles faced a choice in 2016, where they could either have an increase in cash redemptions in order to cancel their deferred liability, or have their cost of capital increase due to the huge deferred liability that the ratings agencies do not understand. They chose the former, then got hit with a waterfall of redemptions, chickened out and reversed course. This only served to piss off their customers and not burn off the redemption liability in the first place--meanwhile they started their own run on the bank, which cost real cash dollars. This massive deferred liability that the ratings agencies do not understand, is the reason that airlines and banks put these things into companies like AIM in the first place, in order to lower their cost of capital in a capital intensive industry. AC is sooooo stupid, that they are about to spend a fortune trying to bring this liability back on balance sheet--after they figured out how to get it off balance sheet.

    In terms of other redemption options, at Seamiles, we were talking nonstop with casinos. The Salon Suite at the Wynn Encore in Las Vegas is 2261 sq feet and on Hotels.com, it is $1283 a night on the weekend from October 26-29 (3 nights). The same suite is $1150 on the 22nd to 25th of October (Sunday to Wednesday). These suites will be marketed for a few more weeks and then some of what is left will be given to high rollers, and some will go wasted. There is a good chance that the weekend rooms will get used, and a much lower chance that the weekday room will get used. The marginal cost of cleaning the room is in the tens of dollars a night (at most). So Wynn would love to blow these rooms out for say $200 on some last minute deal site, but that risks alienating paying customers and dramatically cheapening a premium product. So the room basically goes wasted, in order to preserve the cachet. 

    Now, someone like Wynn would go to us and say, we want to send an email blast to all card holders who have spent $200k a year on the card loyalty card and $10k a year on casinos. They can then get a premium suite on any day for the next 60 days (while supplies last) at the equivalent price of $200 a night in points. Since it is going to work out as hundreds of thousands of points for the stay, it is difficult to equate to an absolute dollar value, so it's totally off the dollar grid and now doesn't cheapen the premium product. Any card holder would see that the former $1000 room is less than the redemption cost of a flight (in points), so they know they're getting a great bargain, but they cannot put an absolute dollar value on it. Because of the card data, the redemption option is specifically targeted to gamblers. Of that $200 redemption cost, the cost to the loyalty program is somewhere between $100 and maybe even negative, in that the casinos will pay to target guys who like to gamble (talk about HUGE margin expansion). For the casino, they figure that if 1/3 of their revenue is hotel spend (I'm just making up % ratios), then for every dollar spent on the room, $2 more will be spent on gambling and dining/entertainment/etc. So if someone wants to spend $200, they will drop $400 at the casino (or maybe a lot more if they spend $10k a year on casinos in the first place). Since the room was going to waste anyway, that $400 is all incremental margin they would have missed. And to close the deal, they offer 3x points for every dollar spent with the loyalty card at that casino during the stay. That way, they can track who's spending what and that 3x points is also paid for by the casino to the loyalty program. Given the 3x points, it's almost certain that the loyalty card will be used, even if it isn't "front of wallet"

    So, for a room that was going vacant, the casino gets at least $400 of incremental high-margin incremental revenue per night, of which $12 goes back to the loyalty company. The loyalty company burns off points at almost 100% gross margin and the loyalty customer can brag to his friends that for some useless points (no one ever talks about their gambling losses) they got to spend 3 nights at the super luxury suite which would have cost $5k+. Everyone comes out ahead and the loyalty program gets more traction and loyalty from the customer. With big data mining, pretty much every vendor can go to the loyalty program and ask for lists of customers who spend on certain products and then push those customers. Previously, AIM wasn't doing this as they were airline focused. I sure hope they'll transition--and it now makes logical sense to pivot as they are no longer trying to make AC happy for the renewal. We weren't loyalty industry guys when we started doing this, we were just scrappy guys trying to create value and we figured it out. I figure AIM will too.

     


    SubjectRe: Re: Re: Re: me too
    Entry08/30/2017 12:05 PM
    Memberdd12

    yes, that is exactly the way i see it.  further, and anyone please blow holes in this because i am learning on-the-fly here:

    Post 2020, what if AIM just continues to collect coalition fees, then goes out and buys Air Canada or another carrier’s tickets at the market and offers them to its members at a 12% discount (their usual “breakage fee”) to that market price?  In that scenario, assuming the same breakage rates across all programs, half their program (the former Air Canada redemptions) earns a -12% margin.  The other half continues to earn a 12% margin (the non-Air Canada redemption portion).  With this, the company earns zero, but the feared redemption liability is never realized as the float extends into perpetuity.

    In this academic and unlikely scenario (I fully expect new redemption partners to come onboard, heh), the NPV of the next 3 years cash flow (haircut by 25% relative to their guidance) is $450M.  add in the value of PLM, exclude all other assets (including the Air Miles proceeds), add cash / restricted cash, subtract debt and preferred (at par) ... $4 per share. 


    SubjectApparently Mittleman Brothers Agrees With Me
    Entry09/02/2017 04:36 AM
    Memberhkup881

    They filed a 10% position on Sept 1. Seems that the usual process of transfering from Canadian retail to US active portfolio managers is now happening...


    Subjectfront of wallet - corporate
    Entry09/04/2017 08:36 AM
    MemberMJS27

    HKup and others, thanks for a great writeup and thread.  

    HKup, your first hand experience in the loyalty industry is obviously extremely valuable here.  I am curious however if your cruise related experience involved any business cards.  I am thinking probably not.

    I am asking because we know that alot of AC's flyers are business travellers, and these business travellers  may have a very different set of circumstances governing their front of wallet of decisions.  For example, my wife works for a Fortune 200 company and does a fair amount of business travel, all of which is on her corporate card, which she does not get choose.  Further, she does not earn any loyalty points on this card.

    I assume that her company receives the benefit of all points, and that her company is economic in their decision re: what credit card to issue to their employees.

    Given this dynamic, it would seem that there is potentially a large portion of aeroplan card holders that are NOT in a position where inertia is the main factor keeping them loyal.  Rather, the fate of these cards will be made by a corporate HR dept or the like, which i think would significantly increase the risk that these people leave aeroplan.

    Further, as AC moves to develop their own loyalty program, I would think that part of that process would involve directly approaching corporations.  They likely have the data to  know which companies' employees are flying the most.  I think this data is valuable.

    Anyway - this is just something I am kind of hung up on as I continue digging into this.

    Any thoughts appreciated!


    SubjectRe: front of wallet - corporate
    Entry09/04/2017 10:56 AM
    Memberdd12

    my opinion:  AC is miffed about how much cash AIM generates with this float business, and they are attempting to trap some of it.  however, i think they are looking at it all wrong.  they should be thankful they represent only 11% of AIM's total accumulation fees, but they receive half AIM's total redemptions.

    if AC want this to be anything more than what it used to be, their own frequent flyer program, they need outside accumulation partners.  AIM has spent over a decade developing these relationships, while bearing the redemption liability (real or boogeyman or somewhere in between).

    to me, a corporate credit card is a cost of doing business, but not a driver of incremental business like it is for a bank or retailer.  why would an employer buy accumulation points to reward its employees?  in MJS27's example, where his wife does she does not receive the theoretical points, she is indifferent to them.  she goes to her top choice of airline or hotel, within the spending limit of her employer -- thus i would think her employer funnels its employees to where it gets bulk discount, balancing that with keeping is employees relatively happy.

    XYZ company is hiring employees to work for them regardless, and i suspect like you do, they use their frequency points as a cash back / discount to reduce operating expenses (versus rewarding their employees for making a business trip they are being paid to make and would be making anyway).  HKup knows more about this, so please correct me if I'm wrong here.  this differs from consumer behavior, who like their points -- if i recall correctly, it was HKup's opinion that in many cases, a rational consumer would often go for the cash-back option upon purchase versus the points.

    if it's corporate-driven data, who is the revenue source?  a coporate card customer doesn't want points, it wants reduced fares for its employees.  so if my assumptions on corporate behavior are right, then monetizing that valuable customer data must involve contacting that customer in his/her consumer setting.  so AC needs to develop a coalition mechanism to mine this data, which takes us back to needing accumulation partners.  circular i guess, but the point is the fight is for debit/credit cards, not corporate cards, IMO.  this is why the accumulation points to be had are with the TD's and Sainsbury's of the world.


    SubjectAeroplan >=0 underlying assumptions
    Entry09/11/2017 11:48 PM
    Memberpunchcardtrader

    First of all thanks for this interesting idea, I learnt a lot (always do) and appreciate the business knowledge that I lack here. I agree with you that the real discounted deferred liability is probably much lower and a sudden bank run is unlikely and appreciate the perspective of a typical cardholder and non-existent"rational agent".

    However, should a Aeroplan negative cash flow materialize:

    "Aeroplan CANNOT have a negative value b/c it CANNOT have a run on the bank b/c if that ever happens, they will gate and devalue.". 

    So your interesting framework of thinking rests on accounting for all assets and debt on B/S, while keeping Aeroplan future value (and historical liability) separate saying it is >=0. But your SOTP tells us otherwise because you add the near future cash flow guidance from Aeroplan already (so it means you say Aeroplan is worth >= 600M$).

    There is a path dependency problem: if negative Aeroplan bank run cash flows happen first, management would then need to decide (on a continuous basis) to "invest" in future Aeroplan, or push the nuke button:

     

     - nuke option (gross future billings = liability = 0 to insulate rest of the balance sheet). By the time the nuke button is pushed (the cash flow has turned negative already) some balance sheet contamination has already taken place

     - management thinks the franchise is worth more in the future than remaining cash drain and does not push the button (and has already borne cumulative cash drain that is now a sunk cost)

    Nobody knows what the total negative cash drain will be when it is finished, while it is accumulating (so because of accumulating sunk costs that contaminate balance sheet it is unlikely management will ever push the nuke button). An option in the middle is devaluing gradually as the bank run happens.

    Not so sure if Aeroplan is necessarily >=0 but the interesting thing is that even accounting for the worst case scenario (trying to wrap my head around that), the stock still looks attractive.


    SubjectRe: Aeroplan >=0 underlying assumptions
    Entry09/12/2017 01:55 AM
    Memberhkup881

    Punchcardtrader- To start with, I've not only segregated Aeroplan but all the other loyalty programs (excluding PLM) and the card analytics division on my alternative balance sheet, as AIM disclosure is abyssmal about the various programs on an individual basis.

    Based on this;

    -we know that if these programs are all worth zero, you get about $4 in value.

    -if these programs make it into 2020 and die, we get nearly $10 (assuming that they continue at current steady state).

    -if these programs deteriorate rapidly between today and 2020, we get some value between $4 and nearly $10.

    -if these programs have some residual value after 2020, you get some value between $4 and some much higher number (depending on how much cash accrues to the balance sheet over the next 3 years)

    -you cannot get a value under $4 b/c AIM will gate and devalue if there is a run on the bank

    I set up the writeup this way, as I'm sick of all the Canadian "analysts," Ratings Agencies and all the other idiots continuing to talk about a "run on the bank" that makes AIM go bust. AIM cannot go bust because  as you've copied from me, "Aeroplan CANNOT have a negative value b/c it CANNOT have a run on the bank b/c if that ever happens, they will gate and devalue.". If there is one lesson from my write-up, that is the lesson. Therefore, the shares are worth at least $4 and that value is rapidly increasing due to cash accrual and depending on the ultimate value of the loyalty programs. At this point, I don't even see very many people who are trying to guess at what these programs are worth--they're still in the mindset that they will bankrupt AIM. Real analysts should be focused on what the cash build from today to 2020 looks like and then what the residual value is from there. Unfortunately, until we get more data from AIM on future redemption partners, this is all guesswork, hence the huge ranges available.  

    In terms of your question that they may have some sunk costs and then continue to dump more capital in, I think that's always possible, but a loyalty program cannot really bleed money b/c you will gate and devalue in real time. If you listen to the Q2 CC, they basically admitted to doing this on a small scale during Q2 and they will likely continue to do this. Q2 was the quarter to have the bank run, it didn't happen. There will be elevated redemptions compared to base-line in future quarters, but the program will ALWAYS be cash flow positive b/c as users become disengaged, they tend to simply spend less and hope to earn whatever reward they wanted but devaluations always push it further away, until they quit the program with a bigger points balance than if they had simply quit on the day they mentally decided to quit. Disengaged card holders don't bother to redeem for a $20 gas card. They lose their card, forget their password and eventually forget that they have points saved somewhere.

    If you look at the history of loyalty programs, and there have litterally been thousands of these things in North America alone (I've been to a few industry conferences where they talk about the dead and dying ones), they NEVER bleed money on the way down, unless SG&A was bloated. Think of Blue Chip Stamps. It just muddled to zero. If it was bleeding, Buffett would have killed it. Instead, they had a control bleed to zero situation. The only time you EVER get a run on the bank, is when you have some sort of call to action where you force people to burn points. This is what Air Miles did last year stupidly. Banks, airlines and credit card companies have done this from time to time in the past, to burn off liabilities (after a devaluation of course), in order to improve perceived leverage ratios for regulatory reasons or to re-fi debt.

    Now, these groups keep these things off-balance sheet in entities like AIM for just that reason, and you don't have regulators or ratings agencies force a burn event. If a regulator forces a burn event, there are insurers who will instead take the program liability onto their balance sheet with a liability-sharing agreement, hence you get less forced burn events. If AIM wanted to stop all this "run on the bank" nonsense, they would just cede all their deferred liabilities to an insurer and take a 1-time hit and elimitate the whole deferred liability question. Based on my knowlege of pricing back in the 2005-2010 age, the ~$900m of LT liabilities older than 2 years would cost them $25-100m in a 1-time premium payment, depending if it is fully ceded or it's a shared agreement and the agreed annual devaluation rate (basically a lot of variables on age of LT, spend patterns, etc, but assume the lower band here as the correct number). Other options are agreements where certain future card spend against those liabilities would accrue to the insurer up to the $900m threshold level of float with anything over $900m going back to AIM with an annual step-down in the residual value or some variation on that depending on what AIM cedes. If they fully cede, then any net growth in liabilities to that segregated group of card holders over $900 goes back onto the AIM BS, but at the same time, every year, the $900 threshold drops down and it drops fast, at tens of mil a year, maybe even $100m, so that even if the program dies fast, AIM probably gets net cash from future spend after 5-10 years. I can explain better if this doesn't make sense. Basically, I'm saying that a competent insurer who is in this industry will value the LT at 3-6% of of stated value (usually the lower band if AIM takes on a bit of risk and agrees to certain things) and AIM has other options here. Anyone who values this liability at anything close to face value is insane b/c you can sell the risk today for a single digit % of face.

    The ST will be revolving float and they can even insure that (at a higher cost unless they risk share or rotate it). If AIM wanted to move the whole $2.2b, they could do that too. Basically, there are competitive insurers pricing this stuff out on a regular basis, who've taken over the liability of many of these loyalty programs. I trust their actuary tables as I don't think there has ever been an insurer to lose money on one of these deals (as up to my knowlege in 2010). Even a crappy agreement could move 100% of the $2.2b off BS for waaaaay less than the current restricted cash balance. Probably a small fraction of that balance.

    It would release huge capital to AIM as they would no longer need to restrict their cash balance--as opposed to ratings agencies who panicked and forced them to restrict more cash. I think that would probably be a dumb decision  to cede this liability b/c the overall liability cost would be less to AIM if they controlled it on their own BS through gate/devalue. What I'm saying is that a competent insurer would be willing to bet that $2.2b is really a much smaller liability and anyone with 20 minutes of knowlege on this industry would also know that.

    Look, anything is possible here, maybe AIM mgmt wants to suffer $20m a quarter and ignore it for 3 years, but if they didn't go cash flow neg in Q2, when will it happen? If there was no big redemption cycle in Q2, the next redemption period is Q1/2018 when travel spikes and cardholders may try to use up points to switch cards. After that, I don't think we see any spikes until early 2020. The only risk really is that Air Canada forces a run on the bank through a major marketing campaign, in order to increase load factors and hobble AIM. However, I think that is unlikely as the JV agreement probably bans such a thing (our agreements did).

    As long as the loyalty programs aren't worth negative, the shares have to be worth more than today's quote and probably A LOT more. I hope this helps.


    SubjectRe: Re: Aeroplan >=0 underlying assumptions
    Entry09/12/2017 08:09 AM
    Memberdd12

    agree with hkup, well said.  of course i am biased as i have gone from turning my nose up in June, to learning more and becoming intrigued, to believing this is a rare stock market gift ... moved out of the credit and preferred and into the common equity.

    i think the Air Miles case is important.  6 years ago, they told everyone that their points will expire after 5 years.  nothing happened for 58 months, then there was a rush at the end (November/December 2016) and redemptions increased 60%.  the company wanted to eliminate the long-term redemption liability and chose to do so with cash.  they panicked and back-tracked, but it wasn't because of the cash liability associated with the elimination of the tail of the program.  rather, it was the customer backlash (actually revolt), and it appears the company under-estimated the degree of customer engagement.

    fast forward to 2Q'17, Air Miles is back to issuance growth and is showing no signs of sponsor attrition.  the durability of these programs has been stunning to me and is the biggest investing-related surprise i've come across in a long time.

    the circumstances surrounding Air Miles are also encouraging.  they have no exclusive redemption partner.  they have double the members of Aeroplan, but they have 75% of the revenue of Aeroplan.  Air Miles EBITDA is roughly $200M, which means it is run at a significantly higher margin than Aeroplan.  i asked AIM mgmt about that, they just said that Air Miles runs it program with a higher breakage target ... huh?  you can do that?  AIM is perplexed by how little mention this gets from anyone; they say that "people assume we can't make any changes" to the program's operating targets.

    plug in Air Miles' operating metrics into Aeroplan after 2020 and you get a double digit stock.  i agree with hkup that the downside is $4.


    SubjectRe: Re: Re: Re: Re: Re: Aeroplan >=0 underlying assumptions
    Entry09/12/2017 11:53 AM
    Memberdd12

    well if TD and CIBC value their customers and don't want to risk pissing off their cusomters, then points are continuously issued, the float extends and any redemption spike (highly unlikely, IMO) is covered by the reserve.  but that is offset by future rearnings, as the program extends past 2020.  highly likely less profitably as the AC deal was favorable, but in this scenario $4 is conservative.


    SubjectRe: Re: Re: Prefs, TD Behaviour
    Entry09/12/2017 06:26 PM
    MemberMJS27

    thanks for clarifying.

    the fact that you can keep the same credit card number obviously weakens the front of wallet case, but at the same time, it likely strengthens the stranded miles case.

    I realize you proactively sought out a new card in your example - do you (or anyone else who has an existing aeroplan card) know if the banks have proactively tried to migrate customers to the infinite card?  seems unlikely, but i'd be curious...

    thanks again


    SubjectRe: Re: Re: Re: Re: Prefs, TD Behaviour
    Entry09/12/2017 11:14 PM
    Memberhkup881

    Thanks for the data Fenkell

    I'm not particularly surprised at TD's behavior. Remember, you are primarily a TD customer as you hold their credit card and they hold and service your credit card receivables. You are likely very lucrative for them and they're happy to let you switch between the various options within their menu, even paying you added miles each time you do it. What they don't want, is for you to become a CIBC/RBC/etc. customer. The bank issuing the card has the vast majority of the economics in this relationship, from interchange fees to debit receivables to international spend fees, etc. TD isn't particularly concerned about where you collect your points as long as your card is with them and it seems that by you asking the right questions about Aeroplan, they pushed you into one of their other programs. On one side, Aeroplan will lose future spend, on the other side, your existing Aeroplan points are very likely to become stranded and suspended after a period of inactivity (depending on which province you're in). Remember, at this point, as long as the loyalty programs aren't worth negative, AIM is worth more than today's quote. So if you leave stranded miles, it makes it less likely that Aeroplan has negative value. When AIM trades up into the mid/high-single digits, the debate will switch to what the future program looks like, but for now, the loyalty program has to simply have a positive value for the shares to go up. With Q2 increases in spend and aggregate cardholders, it seems obvious that more people are entering the Aeroplan program than leaving the program. That's a good thing for Aeroplan too--but isn't getting any value at all today, as Aeroplan still has a negative value on the balance sheet.

    In terms of the prefs, I don't think you need to value those. When they get turned back on, they will trade back into the 20s but by that time, the common will probably have gone up 5x from where I wrote it up. Even then, they will represent a drag on the earnings to the common of around $13m a year. I think it's easier to just take whatever future CFFO figure you get, subtract $13m from it and then put a multiple on it for valuing the common as the prefs won't get redeemed for ages, if ever as they're VERY cheap capital for AIM.  


    SubjectFuture Redemption Liability
    Entry09/13/2017 07:29 AM
    Memberskierholic

    Thanks for the very interesting idea and great discussion here! I buy hkup's argument that AIM can always gate / devalue miles such that any "run on the bank" is not possible and hence the worst case share price of 4. And I know there already many scenarios being thrown out there already. But please indulge in one more "thought experiment" here. Say banks dont want to partner with Aeroplan post 2020 and that the program goes into win down mode. I would imagine that they will need to pay some redemption liability out given that it is ~2bn outstanding. Granted that the redemption wont be concentrated and will spread across a period of time. Granted that Aimia will devalue and gate the miles. But even if we assume that 10% is being redeemed, it is 200m and siginificant portion of the upside is gone. Point here is that mgmt needs to be very aggressive in gating the program to ensure zero redemption liability? Are they prepared to do that?

    Separately, is there any regulation body overlooking this for example consumer protection to ensure a minimum amount of redemption is fulfilled?

    It sounds like you worked in the loyalty program industry before is that correct?


    SubjectRe: Future Redemption Liability
    Entry09/13/2017 09:30 AM
    Memberhkup881

    Skierholic,

    I have not "worked" in the loyalty industry, but have had a number of semi-control investements in public and private loyalty programs including start-ups. The largest was the Carnival Cruise program which (if I recall corectly) had about 200k active cards and tens of thousands of "front of wallet" cardholders. As a result, I got a front-row seat as the programs evolved and responded to various stresses.

    You have to remember that a growing loyalty program is an outstanding business as your overheads outside of marketing spend, for even a few hundred thousand card program is only about 10 people as everything else is out-sourced to big data companies and call/fulfilment centers and you get guaranteed costs/margins/etc in these contracts. Sure, you fight about tenths of a basis point on billions in spend, but that stuff adds up FAST!! Even better as far as I am concerned, you get tens of millions (or more) in almost completely un-regulated float to invest with and can then play games with your breakage estimates and marketing spend to almost indefinitely defer taxes on your investment gains using this float. It's simply a great business. Unfortunately, I never got enough control of one of these to control the investment program. In any case, I spent thousands of hours in this industry and met with 100s of people who I asked questions from, in order to improve our programs.

    With that out of the way, your "thought experiment" is nonsense b/c the banks will NEVER leave the program. Remember, the banks spend $100-$500 per cardholder to sign up new cards on just the free points alone. That is before marketing and overheads to sign up these people. After that, only about 1 in 5 cards will even go "front of wallet" for long enough to have a fighting chance to recoup this cost. A guy consistently spending $25k a year on his card (effectively a person with $25k of disposable income and over $100k in overall income), is worth thousands of dollars in lifetime value--hence the reason that the banks make this massive investment in the first place. The person is loyal to the program that recruited him and communicates with him. The bank is just the logo on the card statement. The banks will NEVER do anything to this relationship to risk a cardholder loss. The banks may try to push cardholders into other programs (which strands the miles) or may stop promoting the current program, but they'll NEVER leave the program.

    Just think of all the whacky loyalty programs that are out there that the banks haven't killed off--often b/c the marketing and branding is funded by someone else. You have loyalty cards for everything from sports teams to theatre to political parties to universities to gifting milage spend to charities. Many of these programs are dying, in that someone at some point spent money to build it up, but now there is minimal marketing support and card spend declines each year, but there is still a loyal following that the bank won't upset. When these programs go from 25k users to 2500 users, they NEVER get runs on the bank. They just get stranded float that is the profit from whoever created the program. About 2500 active users is the break-even point for one of these programs (or was when I stopped following in 2010) and below that, only then will the bank risk defections by merging it into the bank's mainline program. If you want a good case study on this, look at the debacle that was the Chase Saphire program. They had budged $250m in lost value in year 1 from customer defections before break-even value by year 2 or 3 from re-gaining these customers. At one point about 18 mos in, Chase was $3b+ in the hole from all the estimated lifetime NPV of previously active cardholders who became inactive or cancelled when they were forced into the Saphire program. Even worse, many of these cardholders were loyal to whatever program they were previously with and they defected to that program when the program engaged a new bank fulfilment partner to continue the card program. After Chase's disaster, I don't think anyone else will try that again.

    In summary, the banks WILL NOT LEAVE. They may poach, but that strands points. Going into 2020, it is hard to estimate what will happen, but I'd expect net defections from the Aeroplan program. After 2020, you probably have more defections. But I suspect that the program goes from $220m run rate to some number that is roughly half as lucrative, before sizable cost cuts that get you a long way back to where you were previously, but on fewer cardholders. In any case, all this does is increase the overall value of Aeroplan. As long as Aeroplan isn't a negative value, the shares are going up from here.

    Every state and province has different rules on miles. The most strict rules (think it's Ontario but don't hold me to that) that I know of says that once you get a mile, it is yours and you cannot lose it for inactivity. There is nothing to say what can happen with gate/devalue. The banks may have provisions there to protect the cardholder, but in the end, the banks only care enough to keep the cardholder engaged--which is what the loyalty partner wants too. After that, it is something of a free-for-all in terms of what can and cannot be done, within reason. Remember, 5-10% devaluation annually will not get noticed by anyone, but it will be VERY sizable after a few years of inactivity for a cardholder, while active cardholders just churn their float and keep a roughly constant level of float.

    Sorry it's so long. Hope this helps.


    SubjectRe: Re: Re: Future Redemption Liability
    Entry09/14/2017 02:13 AM
    Memberhkup881

    Aeroplan's footnotes can say whatever they want to say and loyalty members accept the loyalty program terms, but state and province rules supercede these terms and conditions--hence the real ability to invalidate points is harder. What many programs do, to get around this, is to break the points and then have a 1-800 number to reinstate the points if they've been incorrectly broken.  Some states/provinces allow this. Once again, this is my knowlege dating back a decade, but it's a funnel that means that most points do not come back as there are too many hoops to jump through for $25 in redemption value. 

    If the bank partners leave (which would be insane as the banks would be cancelling billions in value) Aeroplan could go and find new bank relationships for the cardholders who wish to remain with Aeroplan and then Aeroplan would reach out to those cardholders and try to retain them at huge marketing expense--while the banks would do the same thing. These agreements have terms about what each can do to try and retain the customer. In the confusion, often both sides lose customers. So you'd have an issue where a certain percentage of cardholders migrate to Aeroplan, while still having debit balances at the old bank and they get to keep their points. Guys who do not migrate will be left with their old credit balances and a new card at the old bank, but no points or different points as the bank is unlikely to make up the points basket a second time.

    Ironically, I've actually seen this process in action when we invented our Seamiles card and tried to transition cardholders from the CCL card to our Seamiles card. Let me tell you what an epic boondoggle it is. You aren't just signing someone up for a loyalty program credit card. You need to transfer debit balances, point balances, spend history, credit risk, etc. Additionally, many of these people didn't have ready cash to retire their debit balances so they ended up having to keep the CCL card and pay it off over time, hence kept getting drawn back into that card with promotions.

    Having built a few of these, I can tell you they're very cheap. You need a regional bank (larger ones won't deal with anything under 100k cards), and a data firm to do your back office along with a few fulfilment partners. It is $500k in legal to get off the ground and you have a loyalty program. The issue is that the bank will control your points basket until you get to a certain size and can dictate terms to them, so you don't really get to do much with your float except invest it in a money market acct. After a few years, there is an "excess float sweep" that you do get to control as non-segregated, but you still cannot take out and divident it or anything for a few more years as it ages--but you can invest that. So assume, 2-3 years before you have enough float that the bank releases some to you.

    The big issue is that the banks will force you to have a segregated sinking fund that is used to cover their losses if you do not hit certain card counts and spend values within your 3/6/9/12/18/24/etc. month business plan--remember that the bank is funding the redemption reward along with V and MA, so they want these cards to actually get used, not just funding a points basket for you to invest. So it forces you to ramp marketing to something insane b/c it's always cheaper and better to acquire cardholders and engage them, than it is to miss your projections and have them just take the cash anyway. I can say from experience that it's VERY EASY to get someone to sign up for a card. Our SGA cost was only a few dollars over the $50 commission that we gave the booth agents. Call it under $60 per card, then you immediately get $250 into the points basket from the bank provider, so you're $190 net before redemption liability, but since so many of these cards never get used, some of this goes back to teh bank and then after a few hundred in total spend, the rest is ours and gets stranded. So you're probably $100 in net float per card before redemption liability, assuming how many never have a $ in spend. Points liability on a cruise is like 25-50% or something stupid as opposed to airfare that is 90%--which is what makes it so great. After that, you get a % of the interchange fees and even a % of the net interest income on the credit portfolio + fee income and mailer fees and whatnot (as far as I can tell, that's why AC left Aeroplan as they want those buckets and Aeroplan gets none of that today, but will likely get some of it in the 2024 bank renegotiations, hence a nice pop in NOI if you hold that long).

    The cruises were even funding us at 3-5x points for onboard spend, so guy spends $1000, client gets $50 back in points that are 50-75% gross margin to us and then we'd get 1-5% back in free cash directly from the cruise line for engaging the customer, so up to $50 additional dollars. So every $1,000 got us $50-75 in net income from that cardholder, excluding all the other income we made in other places, so we could spend huge on marketing to engage this guy during his cruise. It was a stupid good business, if we could engage people--which we weren't.

    However, until you get to about 2500 front of wallet cards, you lose money at this. Around 5000 cards you start making decent money. At 10k, you're finally really running. But 10k cards is probably 50-100k cards you've handed out and you cannot fund that cost with your net float. So you're $60 x 100k = $6m + marketing + SG&A to get there, so maybe $10m to start up a program and at 10k active cards, you're still not making that much in profits, just a few $1-3m a year depending on spend and it may take you 3-5 years to get there first. So your IRR is crappy, hence why you don't see as many start-up programs. If experienced guys like Aeroplan couldn't get this to work in NZ and other places, then that tells you something. We never got Seamiles to really get traction, even though we had a list of like 200k people we could contact who had a competing card and we had premium placement for booths at all ports in the Caribbean. We got people to sign up, but we couldn't get them to use the damn thing--even when we offered better rewards packages than their CCL card. AC will discover the same thing. In the end, most people are too lazy/stupid to understand their points. They're creatures of habit and just use the same card b/c they have been using it. Then they cash in points haphazardly, not b/c they are targeting a specific item, but b/c they are going on a cruise or flight and wonder if they have enough to get it free or get a free upgrade.

    Based on all the questions on this board and other boards, people are thinking in terms of excel models and are far too granular. People are emotional. If AIM is smart, they'll come out just fine. If they're stupid, they may end up with nothing in 2020.  I am figuring they're somewhere in the 4 out of 10 for competence, which is good enough for me. You get $4-10 in value in 2020 and then something as a residual afterwards. Worst case, these loyalty customers are worth a whole hell of a lot for another loyalty program who has capital. I don't know current values, but 5m cardholders with billions in spend are worth many times more than $2.2b in liability, even if that liability is 100% a real liability, which I hope I've explained ad nauseum that it isn't. There really isn't any way to lose money here unless the credit rating agencies jack up AIM's restricted cash to something insane or AC spends hundreds of millions to force a run on the bank. Otherwise, your value is covered many times over at today's price. Just gotta be patient and let the Canadian fund managers return from their lake-side cabins and do some work here.

    Happy to chat more.


    SubjectOne Last Word
    Entry09/14/2017 06:14 AM
    Memberhkup881

    Not much has been said about the break-up with AC, but I remain convinced that it was a brilliant move for AIM and had AIM telegraphed this better to shareholders, AIM shares should have APPRECIATED instead of declining 80%, which is what makes this soooooo damn attractive today.

    If you go back to our relationship with CCL, it was a 50/50 partnership where our side handled the loyalty rewards program logistics/marketing and card growth/bank relationships/etc. basically, anything to do with making sure the program worked. CCL was the preferred redemption partner who gave loyalty rewards members special discounts on cruises/cabin upgrades/special "invite only" events on the boats/etc. They were responsible for making the loyalty clients feel special. It wasn't too different from the current AC/AIM relationship. The profits of the loyalty program were to be split 50/50. Or at least, that's what our documents said.

    In reality, CCL thought of our loyalty program as a break-even load management tool that would use all excess cash flow to subsidize their own marketing. We looked at this as a business where we invested resources for annual growth + a return to shareholders. These 2 competing objectives were mirror opposites of each other and created ENDLESS friction on everything from marketing budgets to our ability to have alternative redemption options and even invest our float. Basically, despite the success of the program, we both were VERY unhappy and felt that the other side was holding us back. It led to a lot of stupid decisions that hurt both partners in the relationship and dramatically undermined both card growth and the overall profitability of the program.

    In summary, I can 100% see why AIM would want out. They are going to be the winners here as they already have the cardholders, while AC will need to fight for the card holders, while AIM is freed to think more strategically--whereas before, they couldn't act as they were negotiating the renewal for the past year or two. 2/3 as many cardholders at 2-3x the gross margin is going to be a huge win for AIM, expecially if the cost structure is slashed.

    I know this, b/c we created the Seamiles card specifically to get away from CCL, even though it was our bread and butter as we got sick of it. The only difference was that they ended up controlling the cardholders in our arrangement, while we could only competitvely mail them applications--but CCL had the cardholders and points basket when it was all said and done, so they controlled the relationship. AIM controlls the cardholders and AC is in the same situation we were in, where they are going to now have to go poach cardholders and will fail as people are loyal to Aeroplan over AC as they already have that card in their wallet--or at least enough of them are.


    SubjectNew Aeroplan
    Entry09/20/2017 12:15 AM
    Memberhkup881

     

    From Aeroplan Program Updates 

     

    I watched the 1.5 minute "Miles closer" video which shows a lot more redemption options that are higher margin like F&B/entertainment/hotels.

    Seems that they are marketing a more useful and customer-centric Aeroplan as opposed to just a flights program.

     

    The above video has a Sep 12, 2017 date on youtube; hence my guess that this is the start of re-positioning/re-validating Aeroplan with its users. 

     

    Hard to tell how strong customer uptake will be, but if this works, they're really gonna hit the cover off the ball for cash flow--even after losing members to the new AC program.

     

     

     


    SubjectRe: Re: AC investor day
    Entry09/20/2017 11:58 AM
    Memberdd12

    wasn't that special.  i am not so dismissive of the challenges Aeroplan faces, but the NPV calculation done by AC was high comedy.  $85mm in start-up costs and all those billings will magically appear.  i don't think so.

    apparently the market cannot get over the redemption liability.  otherwise it would look at the operating metrics for Air Miles, apply them to Aeroplan, and come to EBITDA north of $100mm, post-2020.  AC just told everyone they will particpate in Aeroplan in the same manner they do Air Miles.

    the market had already begun to discount new economics on the relationship between AIM and AC, post-2020, IMO.  i don't think AC's handling of this situation was prudent, relative to just recouping some of the ongoing EBITDA from AIM via a new economic arrangment.  seems like airline hubris, feeling themselves after a very nice run for their business.  they could have easily trapped significant cash flow exiting their grips with the stroke of a pen, now they have to build it from scratch.  we shall see, i have more time than money.


    SubjectRe: really good comment thread
    Entry09/21/2017 01:21 AM
    Memberhkup881

    There's a lot here. Lemme comment a bit in bold.

    AC call was interesting, my quick thoughts in case anyone cares:

    1.  I think you guys maybe dismissing the value of having the data and that customer relationship internally to AC and just generally the reason that most big companies which have loyalty programs do it in house.  I don't think the concept of outsourcing a loyalty program is the way the future is going and if you do it in house, I would imagine the economics (even excluding data value) are better because you can manage the impact of loyalty with core busienss way better.  (like drop points cost of last minute flights that are empty, give free wifi and tequila to members on the spot since you know what they're doing better, and ultimately get better flight utilization, etc) You're confusing 2 components here. There are customer loyalty programs that offer minimal value to casual users and much higher value to frequent fliers. One of the reasons that AC wanted out of the relationship with AIM, was to better serve their frequent fliers and some of their mid-use fliers. However, that can be done with a simple milage program that is not tied to a credit card. For instance, I live in Miami, so am forced to use AA for my flights and then connect through somewhere else. I have a gazillion AA points, but no credit card and AA makes no money off of me (and gives me very little in return except the ability to board faster). AA sends me a CC offer about once a week, but I don't want their stupid card b/c the miles offer me little value and I prefer my cash back card b/c I actually understand the economics of a loyalty program card and that the cash back card is infinitely better. AC wants to control the data and relationships with their frequent fliers and will start with giving them frequent flier cards and numbers, but that doesn't mean that those fliers will transition their CC to the AC card as the decision is often made at the corporate level for these fliers, and the corporate level is often tied in with who the corporation uses for their other banking needs. So there's a multi-step process here that's integrated with the accounting department and whatnot and inertia is usually the rule of the day. For retail clients, they will find that a more diversified program is preferable to a flights only program and not transfer. My gut feel is that AC will see some transition over time, but will get the frequent flier cards first, then the CC. Those FF cards are not profit centers really.

    2. that being said "high comedy" seems about right for the AC call.  I was just amazed that in the Q&A to hear AC say repeatedly they thought their plan would be at "full run rate" in "something less than 2 years".  They seem to be very casual about how long and hard it is going to be to get a few million people to sign up for their card and I think their costs to ramp this seem low unless they somehow get the banks to pay for all of it (seems unlikely).  I would guess they are hoping for at least 1m people on their card and using it to be "at maturity" and at even $100 acquisition cost per person that is $150m.  The banks may pitch in etc but once you include AC's cost to build out the infra, and everything else I don't see how their numbers work.  I would guess that ramping something like this from zero to that size with no internal team to start with is going to be far harder than they think.  

    You have a number of costs to distributing cards. Some will be paid (mostly) by the banks like the loyalty rewards basket. Others will be paid for by AC, like credit checks, distribution, fulfilment, processing, etc. I think it's actually pretty likely that they get a few million people to sign up for the card over time and the cost to AC is probably around $25-50 per signup range. I mean, if you're stuck on a long flight and the stewardess offers you a free bag of peanuts if you sign up for a card with $100 worth of free miles, I bet a lot of people will do it. The thing is, you can get the cards in people's wallets, you cannot get people to use them. Once a card has been in the wallet for a month without much activity, there is a VERY HIGH CHANCE, that it never gets used. Studies keep showing that the average person has about 6 credit cards and ~90% of spend is on the "front of wallet" card, ~8% is on the secondary card and the rest of spending is on the remaining 4 cards and those cards are only used when the first 2 are overdrawn, lost or turned off for security reasons during travel. They'll probably get a 20% activation rate on the ~2m cards they hand out in the first year or 2, which gets them to 400k active card users. Whooopidy doo.... They then get a few million more AC loyalty fliers who don't contribute anything into the system, but need to be taken care of by the airline for free when they redeem rewards from flights.

     

    3. Their discussion of the transition away from AIM was interesting and seems like this is likely to happen pretty slow which might be good for AIM in some ways but it will be a long duration of slow and lumpy bleed ultimately also which I'm not sure how AIM handles that from cash flow perspective as that might be the hardest situation for them because they can't really gate or play games with the miles as much in that scenario or they can risk accelerating the losses.  I would assume that the amount of communication and reviews and information available to loyalty card holders is way higher now than it was 7 years ago.  I am increasingly thinking that what we'll see with AIM is actually going to be a fairly drawn out period of 2.5 years of declines where as before I was thinking it would probably be fine for next 20 months and then have a BANG right at the end of people leaving to spend the last of their miles and then Aeroplan is left with probably 65% (wild guess) of the members they previously had.  I don't know, maybe they'll get both.  

    AIM can ALWAYS gate and devalue. They will be able to do that before 2020 and will be able to do that with the residual program that AC will have after 2020. AC is slowly waking up that you cannot have ~12-14% of load factor disappear overnight without a few year transition period during which, you try and poach AIM customers. During this period, AIM will be constantly diversifying redemption options, while AC will start at zero customers and only their own airline as the redemption option. Therefore, AIM will be able to direct people AWAY from AC flight options from today onwards, during a time when AC doesn't even have a program in place yet. AC will learn that AIM has the power in this relationship and AC will be the one to suffer pricing pressure as a result since AIM controls the customer spend and can incentivize spend in different directions through bonuses, lotteries, point spend multiples, etc and different flight redeption options too. In terms of the spend profile between now and 2020, there is really no way to know what happens as there isn't enough data. Q2 would seem to imply that spend remains constant or up with the overall Canadian economy.

    4. Ultimately I get the feeling that probably will happen is in maybe 2023 or something AC will just buy aeroplan once they realize how hard and expensive this is and they are not at their targets.  Even just valuing Aeroplan on users at that point, $100 per active user and maybe 3m users at that point is still $300m in value, albeit 6 years from now. 

    AC won't be able to afford Aeroplan in 2023 as it will be worth a few billion. Active card users are worth a whole lot more than $100 each. I'd guess that in today's competitive, low interest rate world, those cards + bank servicing rights are worth a thousand or two each in combination--especially as Aeroplan cards tend to skew higher income. AIM will almost certainly get more of these economics after 2024 when they renegotiate the bank side.

    By 2020's, AC will have serious load factor issues as the airline cycle will have turned with new competition all ordering planes and AC missing out on whatever load AIM directs to their new partners.  AC needs to strike soon or they miss it. In fact, AC may have cash flow issues by 2020...

     

    5. My price targets are a bit lower for AIM because I think you guys aren't including much taxes on anything, which is usually how I do a SOTP analysis, and then also you need to discount to Present if you expect some future sale and then I also think AIM needs to and will keep some restricted cash on their balance sheet for their various loyalty programs so it's not like 100% of their cash is "free" and then I also do not exclude the senior preferreds from my equity valuation, and then there is a -$100m pension liability and AIM's balance sheet currently has a -$50m working capital deficit additionally that they talk about and then I'm also pretty skeptical of the size and costs of executing this magical -$70m of cost out they suddenly just found on the ground.  That stuff adds up.  Also this is going to take a long time to play out imo before the stock re rates so you have to factor in that time duration into any IRR calc.  I'm also grouchy and pesimisstic by nature and may be way off here!

    You're right, I should include taxes on PLM gain on sale (though they may be spun out tax-free) and there's a pension liability. The other stuff is debatable. I'm pretty sure there's a whole  lot more than $70m in cost that can be taken out here. The cost level seems pretty bloated and as the business simplifies, all these jr VPs are gonna go somewhere else. I don't know the best way to value this, but I thought SOTP was the easiest way to show just how silly this valuation is.

    I bought some stock awhile back and own some but if you include all of the above I don't think the upside is as high as is being thrown around.  

     

    two quick questions for you guys if you don't mind:

     

    1. Do any of you guys know of the case studie(s) that AC is using to justify this repsonse?  I would be interested to see the loyalty plan card migrations that were smooth sailing and at "full maturity" in <3 years.  I've been looking around but haven't found them yet.

    "Calin Rovinescu Chief Executive Officer, President and Non Independent Director -- I mean, I think that if you look at models elsewhere where you've had a very successful transition with a strong credit card partner, the transition time is not particularly long, especially if you're well-prepared in advance,

    I don't know of any b/c it has never happened...  "Strong credit card partner" c'mon really? do you really think that in a country with 4 effective banks, these banks will sign up AC and then push the AC card over their own internal one? or the dozen that they support for mature and successful loyalty programs like Aeroplan or Air Miles that will have superior economics to the bank as they are already at scale and were negotiated at a time when these loyalty programs were weak? AC is gonna barge in there, demand all sorts of stuff, get the best deal they can negotiate, lock it in for 15 years and then wonder why the banks don't push people from their own internal card programs. It is more likely that these banks will be poaching AC cardholders for their own programs, not the other way around. AC is delusional here. Would you as a banker prefer Aeroplan where you get to keep 75-90% of the economics?? or AC where you get half the economics of the program?? Besides, when you push a cardholders to a new program, you are going to lose some to other cardholders along the way... 

    2. Also I'm concerned that this partner transition could be a struggle for AIM and it maybe harder than is being discussed.  AIM certainly needs to have a strong airline on their plan I think and probably have to assemble a few together to replace AC.  What kind of timing and partner transition for airline replacements for AC are you guys expecting for this?  

    I am just thinking that it may be hard for AIM to bring on new airline partners of size while the AC relationship is still going on because then those partners would have to compete with AIM on AIM's platform and given the beneficial economics AIM gets from AC, that it would be not beneficial for the new partner to be competing with AC on the platform.  AIM also has capacity committments with AC they need to fulfill and I'd assume AIM likes the cash flow from the AC deal and so won't want to push away from that too hard.  I get your point that cruiselines offerings etc will be added, and totally agree, but Aeroplan will need a credible airline partner setup at least 12m before the end of the plan and I'm trying to think out loud about how this plays out, since the trajectory and timing of this transition likely impacts how current aeroplan users think about possibly leaving the card. 

    There are dozens of international airlines that will want to be on the AIM platform directly as opposed to having to go through AC's Star Alliance relationship. The pricing will be closer than you think as AC gets a commission by pushing Star Alliance flights through its channel. If AIM offers direct access to the individual carriers, the pricing will normalize a bit as it will also cost AC in terms of their debits/credits into the alliance. Besides, if AC's load factor drops, they will have to suffer margin pressure to AIM for those flights. AC cannot ignore 1.9m flights a year b/c they still gotta fly these planes full or empty. AIM can play the airlines off each other, or direct people to other redemption options.

    In the short term, the agreement going out to 2020 may limit AIM's ability to bring on new carriers until then--though they will probably PR that the relationship goes live in 2020, to keep card holders engaged. AIM has the spend, carriers always need more load. AIM controls this situation--AC is gonna be the weaker player here. Remember, flights are the lowest margin components anyway for AIM, so they will keep pushing to diversify.+ WestJet and Porter will love to have guaranteed load as they add planes, as it reduces the financing cost of that growth. Once again, AIM wins. I bet there hasn't been a deal yet, b/c AIM has such a strong hand, that they're really grinding these guys.

    Why does everyone keep worrying about who the new airline partner will be? Every airline needs load factor and will take any price over the marginal cost of delivering an additional seat. Every airline in this galaxy is currently in line waiting to pitch AIM on including them in the program, not the other way around.

     

     


    SubjectHas anyone spoken with management recently?
    Entry09/22/2017 02:56 PM
    MemberOsoNegro

    I’m in the process of trying to set-up a call with the company…So I’m asking if anyone has heard from management what are their thoughts on the "economics" of Air Canada’s proposed loyalty program? I'm curious how did Aimia react when Air Canada said that in 2 years, it could built from scratch a loyalty program with an NPV of ~$2 billion, on ~$85ish million in startup costs?

    Please tell me if I am wrong here…but if 1) AC thinks their loyalty program will be worth $2 Bn, 2) the market values Aimia today at ~ 2x free cash flow…then 3) the truth is somewhere in between? Last time I checked the bonds mostly recovered...and when the equity and debt holders disagree on valuation, I am inclined to trust the debt holders more. Does anyone have a handle as to why the Canadian market has not bid this up more??? 

    If Joel Greenblatt ever did a sequel to his special situations book, I feel like Aimia could get its own chapter....Or I could be 100% wrong. I dunno...


    SubjectRe: Has anyone spoken with management recently?
    Entry09/24/2017 02:12 AM
    Memberhkup881

    I’m in the process of trying to set-up a call with the company…So I’m asking if anyone has heard from management what are their thoughts on the "economics" of Air Canada’s proposed loyalty program? I'm curious how did Aimia react when Air Canada said that in 2 years, it could built from scratch a loyalty program with an NPV of ~$2 billion, on ~$85ish million in startup costs?

    I'm guessing that you've never had a Canadian mgmt team lie to your face about the value of their next project. Maybe you need a trip to Vancouver....  I hear those mining guys are all straight shooters...lol

    Please tell me if I am wrong here…but if 1) AC thinks their loyalty program will be worth $2 Bn, 2) the market values Aimia today at ~ 2x free cash flow…then 3) the truth is somewhere in between? Last time I checked the bonds mostly recovered...and when the equity and debt holders disagree on valuation, I am inclined to trust the debt holders more. Does anyone have a handle as to why the Canadian market has not bid this up more??? 

    I think this is likely one of the best opportunities in years and I'm STUNNED it has taken so long since the original announcement. What part of this story are a bunch of value investors struggling with? We aren't even talking about some sort of pico-cap, this thing trades millions of dollars of stock each day and was worth over $2b before fears of the AC contract cancellation started. Guys on VIC should be all over this thing.

    Even today, after a run-up from when I originally posted, we're at;

    - 2x cash flow

    - 2.3x net cash

    - 70% of net cash + PLM value and my hunch is that PLM is worth a whole lot more than the 10x EBITDA that I valued it at (you get Aeroplan + loyalty programs for free)

    - Air Canada says that if they can replicate some portion of it, it's worth $2b, hence the residual Aeroplan clients + PLM + international programs + net cash + net cash build for the next 3 years should be worth more than book value at least (book being net cash + PLM + international programs + Aeroplan).

    I really struggle to get a value for this company that isn't a whole lot higher. If we were trading at $5-7/shr, we could debate what Aeroplan looks like after 2020 or how much cash is created between today and 2020 or something. But at less than book, the company is being valued based on death and any smart investor can call up a few loyalty consultants, talk for 20 mins and realize that gate & devalue, means that Aeroplan can NEVER have a negative value. In a worst case scenario, if you kill Aeroplan today, you are left with international coalitions + PLM + net cash and you're trading for more than $5-6 (yet today you also get Aeroplan for free).

    In summary, I am also stumped.

    Does anyone have a handle as to why the Canadian market has not bid this up more??? 

    I think that the Canadian market is mostly not very sophisticated and it is up to the US market to bid it up. I've spoken with lots of friends in Canada, and they always say the same thing "AC left, so AIM is dead"  when you ask them why, they don't really know. They just assume that's the whole business--which isn't true, but they aren't looking any further. Americans aren't familiar with Aeroplan, so there's no logical end buyer for this thing, at least for now. So this may be a slow process, but I'm pretty shocked at how slow it's been.

    I suspect that an international loyalty programs or PE will put this into play if the price doesn't go up soon. PE could pay $4/shr today, pocket $1/shr in net cash, sell off PLM and international divisions,  use the future cash flow from Aeroplan between now and 2020 to pay down all the LBO debt and get a free call option on what Aeroplan does over the next few years, but shielded from being a public company, they can probably re-invest in the business in smarter ways. So, essentially, this is PE 101, in that you can come in and liquidate all the other assets for more than the purchase price of $600m and end up with a business that is likely to do over $100m a year in cash flow going forward. That means that if the public markets don't re-price this, someone else will.

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Aeroplan >=0 underlying assumptions
    Entry09/24/2017 03:24 PM
    Memberpunchcardtrader

    So if there are no regulations on the loyalty business (except for some very specific points), why shouldn't they spin-off the whole Aeroplan business with all redemption liabilities attached (or reversely spin-off all investments)? Does negative equity violate any rules (when adding a parent guarantee for debt holders)?

    The SOTP would be >4$ overnight as Aeroplan gets insulated from other pieces while the upside would be retained? Isn't this a better option than selling the program to a PE buyer? 


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Aeroplan >=0 underlying assumptions
    Entry09/24/2017 11:57 PM
    Memberhkup881

    Lots of different ways to "create value" here. Just need someone to get active and force the issue. Though, the share price may recover fast enough that it isn't needed. It's not like they really need to insulate Aeroplan as it's not a liability to the parent.

    At the same time, I think the new CEO is doing the right thing in selling off pieces and simplifying the business--while cutting lots of costs. Maybe he gets there on his own.


    SubjectPLM
    Entry09/28/2017 06:40 AM
    MemberSasquatch

    Hi hkup, where do you get to $100m in EBITDA from PLM?  Based on 2016 FS I can only get to $65m at most.  


    SubjectRe: PLM
    Entry09/28/2017 02:03 PM
    Memberhkup881

    you're in USD. convert to CAD.


    SubjectRe: Re: PLM
    Entry09/29/2017 02:59 PM
    MemberSasquatch

    Thanks hkup.  You are using page 64 of the annual report as below or is there something else that I am missing?  It looks to be in CAD.  I realize this is probably a rounding error in the bigger picture but just trying to understand the downside to the best extent possible and this would be a ~$250m value difference at 10x EV/EBITDA. 

    https://www.aimia.com/content/dam/aimiawebsite/financial_reports/2016/annual/Aimia%202016%20Annual%20Report_Final_EN.pdf 

     


    SubjectRe: Re: Re: PLM
    Entry09/30/2017 04:01 AM
    Memberhkup881

    I took US $19m of Q2 adjusted EBITDA and annualized it, so I'm at US $76m which was CAD $100m when I wrote it up and high 90's now at current FX. Q1 was US $16.4m. This business shouldn't have much seasonality, so I felt that annualizing it was acceptable (though clearly not scientific).

    Now at 5.1m card members up from 4.8m at year-end 2016 and 5.0m in Q1 2017.

    I think this shows just how fast it's growing QoQ. Given the negative working capital of the business, huge operating leverage of what is effectively a data-center and huge runway in Mexico at only 5.1m members today, I think 10x adjusted EBITDA is pretty cheap. I'd pay well more than that if it were trading seperately....

    Hope that helps


    SubjectAIM Q3/2017 Earnings: AKA What The Hell Is Wrong With People
    Entry11/09/2017 10:45 PM
    Memberhkup881

    So, earnings came out last night and I quickly read through for a few key segments of interest to me (redemptions, card spend, cash build, PLM) and within a few minutes, I was celebrating with a bottle of tequila. I figured we'd be up HUGE today as the whole bear thesis has now been invalidated. Instead, it's up 12c. What the hell is wrong with people??

    For a quick backstory, AIM has been in the dog-house ever since Air Canada decided to end it's agreement in 2020. At first, there was a fear of a run on the bank (didn't happen and redemptions have stabilized at a few basis points worse than card spend for a slight cash leakage), then a fear that cardholders would leave AIM for other loyalty programs (active cards and spend are both up), then a fear that they'd have to spend massively to buy AC flights at retail market prices (redemption cost is down as the business diversifies into non-airline spend), then a fear that they'd have a liquidity crisis (cash is waaaaay up) and now I don't know what the excuse is for the stock to be the cheapest liquid stock in the galaxy, trading at .9x EV/cash flow with half the market cap in net cash and with a seperate business not taken up into the financials that is worth more than today's market cap on a stand-alone basis!!!

    While there are a lot of moving pieces to the adjusted numbers due to rapidly down-sizing the cost structure and eliminating unprofitable divisions, the overall result was roughly inline EBITDA, better than expected margins, maintining guidance on cash flow of $220m (market cap is now $425m) and guiding to increasing EBITDA margin along with acceleration of cost cuts (sure sounds like 2018 guidance will be up from 2017 guidance when released with Q4 results). Normally, meeting guidance and guiding up slightly may lead to a shrug, but we're at less than 2x cash flow, with 1.44 a share of net cash (shares closed 2.80) and .9 EV to cash flow, with cash flow now growing as revenues grow, I just don't get it.

    (in $CDN Million)

    Cash and Investments         669

    LT Debt                             450

    Net Cash                            219

    Net Cash/Share                 1.44

    Cash Flow Guidance           220

    Cash Flow Per Share          1.44

    TTM Cash Flow Per Share    1.40

    Equally important, AIM's 48.9% interest in AeroMExico's loyalty program (PLM) had yet another huge quarter of member and EBITDA growth, going from USD $19m in Q2 to USD $21.2m in Q3 and the 9 mos of 2017 show USD $56.6m of EBITDA vs USD $48.1m in all of 2016. Annualizing the USD $21.2m of EBITDA gets you to USD $84.8m, slapping a 10x multiple on that (I personally think it should be much higher given the runway and growth prospects of a negative working capital business) and you're at USD $848m and AIM's 48.9% is worth USD $415m or CDN $525m at today's fx rate. That's $3.45/shr + $1.44/shr in net cash = $4.89 and you get a pile of businesses that spit out $220m a year in cash flow for free!!!

    What The Hell Is Wrong With People??!!


    SubjectRe: Re: AIM Q3/2017 Earnings: AKA What The Hell Is Wrong With People
    Entry11/10/2017 09:06 AM
    Memberhkup881

    $4.89 which is today's book + $600m (3 years of cash flow) + $70m of annual run-rate savings + interest savings and net interest income from accumulated cash reserves + growth of PLM over next 3 years - whatever severance and cost reduction expenses are incurred along the way. I figure by 2020, you're at at least $10/shr in tangible book (mostly cash and PLM) and then you have a business that's moderately impaired and maybe doing $140m of cash flow a year $220m current run-rate-$150m hit from customers switching to AC+$70m in cost savings=$140 and I really don't see a $150m hit from customer defections. I'm just trying to be draconian here.

    If you're at $140m/ maybe it's worth 10x that cash flow and you get another $10/shr in value, so put it all together and you're at ~$20/shr in 2020?

    We're all value guys on this site. Why aren't people all over this?? It's trading at less than 1x EV/cash flow and you get PLM (worth more than market cap) thrown in for free.


    SubjectRe: question
    Entry11/10/2017 09:12 AM
    Memberhkup881

    Spend will track GDP. So if GDP is down, overall consumer spend will be down roughly the same (while cards keep gaining market share from cash), which somewhat offsets that.

    I wouldn't expect much change in redemption patterns. It's not like people are suddenly so poor that they need to redeem for a $10 gas card or something. Aeroplan members tend to be wealthier than your average Canadian.

    Overall, the loyalty industry just plods along no matter what happens in the economy and a few hundred bps in spend or redemption won't impact the thesis coming from this valuation level.


    SubjectRe: AIM Q3/2017 Earnings: AKA What The Hell Is Wrong With People
    Entry11/10/2017 09:30 AM
    Membermack885

    We were equally excited about the quarter and shocked by the subsequent opening down 10%. Most importantly, no proverbial redemption “run on the bank”. I couldn’t believe aeroplan even grew and mgmt said people that did redeem miles were using the card and accruing miles again. PLM was solid with sequential EBITDA growth. Only hiccup was Nectar/Intl down which is partially explained by partner transitions. The conf call felt like the twilight zone with analysts asking questions that seemed premised on the stock still being $40 rather than a distressed stub equity. 


    SubjectRe: Re: AIM Q3/2017 Earnings: AKA What The Hell Is Wrong With People
    Entry11/10/2017 09:38 AM
    Memberhkup881

    There were 2 questions. It's been left for dead...

     


    SubjectRe: Re: AIM Q3/2017 Earnings: AKA What The Hell Is Wrong With People
    Entry11/10/2017 09:45 AM
    MemberHamilton1757

    We agree - this stock is completely insane.  Our stake in PLM is probably worth $4-5 per share right now.  We'll have net cash on the balance sheet in excess of even the prefs by year-end.  So, we could collapse the balance sheet and literally GIVE Air Canada Aeroplan and this stock would likely double overnight.  Meanwhile, wouldn't it stand to reason that Air Canada's minimum bid to buy Aeroplan outright would be the NPV of the next 3-years of FCF plus the capex they are going to have to spend between now and then trying to build their own program - say $750mm (i.e., they could literally pay themselves back with the FCF from the program by 2020 and have zero risk of ramping the program).  Getting control of Aeroplan now would also allow them to more efficiently manage billings (seems to be a big issue for them) as opposed to waiting 3-years, perhaps driving another $100mm of revenue annually and they could also potentially rip the same costs out that Aimia is undertaking, suggesting their minimum bid should be significantly higher than $750mm - say $1-1.25bn?  Seems like that would be a phenomenal outcome for both sides.  

    They are on the road next week - would imagine that should be positive...


    SubjectRe: Re: Re: AIM Q3/2017 Earnings: AKA What The Hell Is Wrong With People
    Entry11/10/2017 10:25 AM
    Membermimval

    We agree that the report looked good.  The fact that the business showed resilience (and didn’t implode as many skeptics feared) for a second straight quarter after the May news of Air Canada’s 2020 exit should provide further comfort to investors and get the stock price back up to a less panicked valuation.  We withheld speaking publicly about our ownership of the stock until we were able to finish building our position.  Following is a very short summary of our thesis from our Q3 Investment Review:  

     

    Aimia Inc. (AIM CN): Aimia is a leading provider of coalition loyalty marketing programs like Aeroplan in Canada and Nectar in the UK. We initiated our position in May following a >60% one-day decline in its stock price after the company announced that Air Canada, its largest partner, would not renew its contract that is set to expire in 2020.  The stock dropped an additional 25% in response to the Aimia’s mid-June announcement of a suspension of its dividend.  We presumed that the dividend would be suspended upon entering the stock and believed this was a sensible course of action in order for the company to pay down its debt.  Aimia produces significant free cash flow and trades at an extremely low valuation, and there is both the possibility and likelihood that Air Canada will be replaced by other airline partners.  Through its joint venture with Aeromexico (AEROMEX MM), Aimia also owns a 48.9% stake in Mexico’s leading coalition loyalty program that in our estimation is worth more than the current share price alone.  The stock price decline, that we believe we took advantage of, was exacerbated by both sales of funds mandated to hold only dividend paying stocks, and index funds that were forced to sell it upon its exit from various indices, as well as panicked individual investors who fail to realized that even if Aeroplan became worthless due to Air Canada’s exit from the program in 2020, equity investments and other subsidiaries, combined should result in equity value well in excess of the current stock price.  And if Aeroplan does find replacement partners for Air Canada before 2020, the fair value for the share price would be triple the current price, which we think will be the case.  These coalition loyalty programs are not popular in the U.S., although American Express is trying to build one called “Plenti,” yet they are very popular in Canada and the UK and many other countries.  These are negative working capital businesses with sizable float and a very high conversion of EBITDA to FCF.  Think Berkshire Hathaway’s Blue Chip Stamps, or any airline’s frequent flier program (the most lucrative part of any airline company), or American Express’ Membership Rewards program…the economics are similar.  We are Aimia’s second largest shareholder now, with just over 10% of the shares outstanding.  Our average cost is USD 1.53 (CAD 1.97).  It closed the quarter at USD 1.98 (CAD 2.47).  We think fair value based on a sum of the parts is a minimum double from current price, and likely a triple if Aeroplan survives the 2020 departure of Air Canada, as we expect it will.

     


    SubjectRe: Re: Re: AIM Q3/2017 Earnings: AKA What The Hell Is Wrong With People
    Entry11/10/2017 10:26 AM
    MemberHamilton1757

    Further elaborating on my comment below -- Air Canada stated at their investor day that the gap between their EBITDAR margins and US peers of roughly 300bps is primarily due to the loyalty program, suggesting it is a ~500mm EBITDAR opportunity for them (Aeroplan’s current earnings power + cost cuts + more efficient billings management).  Imagine Air Canada issued a press release in a month or two and said that they bought Aeroplan for $1bn and then got on a call and explained that they are going to be able to generate $500mm of EBITDAR (with very little capex associated with it and less cyclicality than their core business) by like 2019 and have zero risk of ramping their own loyalty program from scratch – their stock would RIP.  Meanwhile, we’d wake up with Aimia up several hundred percent.  

    I'd be shocked if that's something Air Canada is still thinking about, if not actively negotiating...


    Subjectcapital allocation
    Entry11/10/2017 08:41 PM
    Membershoobity

    hkup - thanks for all your thoughtful follow up here. One quick question... how do you feel about management's capital allocation abilities? Obviously there is a minimum value here that is significantly higher than the current stock price (even after today) but just thinking beyond that "minimum value"... if we use Blue Chip Stamps as an example, Buffett was able to eventually siphon off the cash and use it to buy Wesco, which was very valuable for the overall business. i.e. float is more valuable if you have a good capital allocator at the helm to invest it. Is there risk management uses all this wonderful cash the business is going to generate in the next 3 years to diversify into something that is a poor use of the cash? 

    Thanks.


    SubjectRe: capital allocation
    Entry11/13/2017 10:54 PM
    Membermpk391

    cash flow is going to be consumed by debt paydown, catch-up & resumption of pref dividends, and resumption of common dividends (in that order).  I wouldn't worry about a dumb acquisition happening for quite a while.

    If they get some great new redemption partners then perhaps they can worry less about debt paydown.  but if that happens you'll already have a nice gain in the pref/common before any dumb acquisitions come along.


    SubjectRe: Re: capital allocation
    Entry11/13/2017 11:51 PM
    Memberdd12

    hold on a second here.  first, this company has $669M of gross cash now.  $300M of that is held in reserve against the credit facility (against $200M drawn on the revolver).  $208M is held in reserve as "a contractual covenant with a major Accumulation Partner" ... and they need cash of say $50M for working capital.

    the company guided to the usual, seasonal free cash bonanza in the 4Q, they said $120M.  i see no reason this is not achieved.

    so taking the $669M + $120M of free cash and they're at year end gross cash of $789M.  subtract the $208M Accumulation Partner reserve and $50M for working capital, you have $531M cash ... that means they could, should and am hoping will retire the senior notes maturing May 2019 and the revolver for a total of $450M (which releases the $300M credit facility reserve), and you're left with excess cash of $81M.  catch-up of preferred dividends is a rounding error, at best.  and as far as free cash being consumed by debt paydown, yeah, for about another month.

    this leads to their history.  since the beginning of 2010, they have invested $124M in PLM, which has clearly achieved a more than acceptable rate of return.  in addition, they have made $64M of other equity investments.  against this total equity investment of $188M (PLM and other), they have received cash distributions of $125M.  so net cash out the door for equity investments of $63M over the last 7.75 years.

    over that same time, they have paid common dividends of $849M and spent $608M on share repurchase.  of course they could do a dumb acquisition, i just don't see anything from their record that suggests this is likely.  especially now, given their focus on streamlining the business, and generating cash.

    finally, as far as new redemption partners, there is no reason to think they cannot achieve acceptable new arrangements.  but more importantly, they retain access to the same ones they have now.  they just won't get the same great economics with Air Canada that they get now, once their current deal expires.  so free cash flow goes from $220M now to, i don't know for sure, in the range of $100-150M post-2020.  at which point they have cash / PLM stake of over $5/share, net of the preferred, and you get Aeroplan for free.  actually, you're getting paid to take it.

    this situation remains wildly misunderstood.


    SubjectRe: Re: Re: capital allocation
    Entry11/14/2017 03:55 PM
    Membermpk391

    dd12-  I agree that cap allocation is not much of a risk here, or at least its way down on the list of risks.  M&A track record is mixed.  PLM ($123M invested) has been a homerun.  Cardlytics (23M invested) has been a triple ... literally, as best I can tell mkt value is roughly 75M.  Carlson Marketing aka Aimia Proprietary Loyalty U.S. (169M invested) ... off the top of my head I can't remember what earnings on that biz have been.  LMG (715M invested) was clearly an overpriced acquisition, but to be fair this was late 2007 (top fo market for a lot of things) and the CEO on that deal is gone, and anyway he admitted that they overpaid.  I just don't see them doing any major acquisition any time soon and I think recent events would have sobered-up just about any mgmt team.

    I'll confess that I haven't read the latest financials, but 208m in redemption reserves sounds low.  maybe you're not counting reserves for non-Aeroplan loyalty programs.  But in any event, the presumption that they will eventually have to pay off not just the 2019s but the entire revolver as well is pretty darn conservative.  (and as you note, it would free up 300m cash).

    My best estimate of FCF post-mid 2020 is closer to the bottom of your 100-150m range.  maybe even a little below.  but these are rough calcs.  if i have time i'll clarify this.  don't forget to subtract PLM dividends from FCF if you're considering the value of PLM seperately.

     


    SubjectRe: Re: Re: Re: capital allocation
    Entry11/14/2017 04:38 PM
    Memberdd12

    mpk391:

    on acquisitions / equity investments:  as i said, i went back to the beginning of 2010, so 7.75 years.  before that, i don't care.  arbitrary line, but i felt that was enough time.  stand by my numbers there.

    the Aeroplan redemption reserve is $208M, as forced by an Accumulation Partner in their contract.  it is in the latest Financial Highlights Presentation.  notably, this reserve was $108M in the March 2017 quarter, the last quarter reported before the AC announcement.  so they have added $100M to this cushion in 2 quarters, and it would appear they are in compliance here.

    if you believe the company does $220M of free cash flow pre-2020, and they can achieve the $70M of cost savings as i do, that's $290M total by 2019.  i hit them for $150M from Aeroplan, post-2020.  so high end of my range, $140M.

    on the PLM free cash, good point.  i'll ding them for $25M there, about what i expect for this year -- another rounding error given where the stock is priced.  in 2020, i have them at $5 of net cash / PLM stake (debt is long gone, and net of the preferred which remains in place), plus a go-forward business doing comfortably over $100M of free cash flow.  it's a double-digit stock by then.


    Subjectone last thing then i'll shut up
    Entry11/14/2017 05:30 PM
    Memberdd12

    the recent tightening of their working capital says something to me as it i think it speaks to the streamlining of the company.  the below suggests to me that they knew or at least highly suspected that the AC announcement was coming before it officially happened.  their stated working capital needs are as follows:

    Q1'16:  $110M

    Q2-Q3'16:  $80-110M

    Q4'16-Q1'17:  $60-90M

    Q2-Q3'17:  $25-45M


    SubjectRe: Re: Re: Re: Re: capital allocation
    Entry11/15/2017 03:19 PM
    Membermpk391

    just curious, how do you arrive at $150m decrease in FCF post 2020?  thx


    SubjectRe: Re: Re: Re: Re: Re: capital allocation
    Entry11/15/2017 06:33 PM
    Memberdd12

    it's very hard to do, my best guess:

    Americas Coalitions Cost of Rewards and Direct Costs should be about $850M -- assume $50M of that is "direct costs" and the rest is cost of rewards, so $800M.

    60% of redemptions go through Air Canada, so that's $480M.  Air Canada does roughly a 15% EBITDA margin, i don't know what they will charge AIM, but i'd think just the marginal seat at the market rate.  i used a 25% markup, so marginal cost increases is $120M.  then i added $30M ... they will likely lose some customers to Air Canada's ridiculous claim that they can build build a $2.5B NPV program from scratch, for instance.

    even if they lose a lot of customers, AIM's company-wide breakage is 12%.  LoyaltyOne (Air Miles) runs at 20%, which is down from 26% as they are attempting to recover from their 5-year expiry policy gaffe.  a 1 percentage point change in breakage adds $20M of free cash flow to AIM.  there are levers to pull here in the management of this transition, and there also unknowns.  but i like the odds here, a lot.


    SubjectRe: Re: Re: Re: Re: Re: Re: capital allocation
    Entry11/16/2017 02:13 PM
    Membermpk391

    yes, Aeroplan breakage is about as low as it gets.  But are they really leaving money on the table?  Maybe.  But when mgmt made the decision to lower breakage in 2013 they did so in response to a lot of public frustration with Aeroplan.  This was a long-tenured mgmt team at that point. 

    Note that their gross margins on miles redeemed for airfare had grown from the teens% to 34.0% in 2012, and this move took them back to the teens.  That said, I've always been mystified at why Aeroplan's EBITDA margins are about the lowest amongst their peers - even vs LoyaltyOne which has no sweetheart deal with any airline.

    On another note, if you really want to get into the weeds on estimating the post 2020 "hit" to FCF, see my Aeroplan spreadsheet - specifically everything that goes into "impact of eliminating ClassicFare discounts" (BP83) and "loss of AC FFP" (BP82).  There's a bunch of assumptions in here and I don't take the results too seriously, but it's a very bottom-up analysis that relies on company-supplied data wherever possible.  The counter-argument might be that this implies a big drop in EBITDA margins from current ~20% while LoyaltyOne is doing north of 20%.  Long story short I think you'll probably do fine with this stock.  I'm posting this simply as a way to spur discussion.

    https://1drv.ms/x/s!Aqrw-OOY6WUh8hUDKp1Qs22MCxrQ


    SubjectAimia endgame?
    Entry01/02/2018 10:50 AM
    MemberHamilton1757

    Hkup881, we couldn’t agree more with your comment below -- I increasingly think that AC tries to buy Aeroplan sometime in 2018/2019.”  Frankly, we think the market is substantially mispricing the likelihood of Air Canada ultimately acquiring Aeroplan or Aimia in its entirety (perhaps in the very near future) -- several data points lead us in this direction and suggest to us that this may have been Air Canada’s plan all along:

    ·         Air Canada’s CEO: 

    Calin Rovinsecu is not your typical Canadian CEO (former M&A/restructuring attorney, Chief Restructuring Officer of Air Canada during the 2000 bankruptcy, Co-Founder of Canaccord Genuity in-between stints at AC, etc.) and has a reputation as an absolutely ruthless negotiator.

     

    https://www.theglobeandmail.com/report-on-business/rob-magazine/we-reveal-the-best-ceo-of-2013/article15650640/

     

    ·         Lack of a staggered board/Ripe for activism? 

    Several of our calls indicated that “personality differences/contentious relationships” developed over years of onerous contractual terms between the two parties played a role in the failed initial negotiation in May.  As such, it seems like all interested parties/stakeholders (most notably, customers and strategic partners) would benefit from a fresh set of eyes at the board level to evaluate strategic alternatives (including spinning PLM, selling Aeroplan, selling Aimia outright, exiting money-losing businesses, etc.).  I would think that all Air Canada would need to do is merely hint that they would be interested in a transaction with Aimia and an activist would show up in a heartbeat – perhaps that would be the easiest way to shake the asset loose for Rovinescu. 

     

    ·         Value to Air Canada:

    o   Strategic Importance:  Air Canada has publicly stated that having control over their loyalty program is strategically imperative – we agree.  The importance of having a fully ramped loyalty program to an airline cannot be overstated. 

    §  Take Aeroplan itself for example, it generates ~$1.1bn of billings annually (net of the $200mm received from Air Canada) relative to ~$150mm of operating costs (pg. 15 of Q3 presentation) and very little capex (~$25mm).  Meanwhile, billings track credit card spend (which tend to track GDP), so that 1.1bn of billings likely only inflects down a couple percent in a recession – as such, a fully ramped loyalty program such as Aeroplan (which the Westjet CEO recently suggested took 30-years to build/ramp, while acknowledging that its own loyalty program was in its “infancy” after 7-years! --  https://www.bnn.ca/westjet-ceo-air-canada-s-new-loyalty-strategy-a-huge-opportunity-for-us-1.918797), provides an airline with a massive annual cash inflow of ~$900mm in a stable & recurring way (which is particularly valuable during a downturn, when load factors drop and the opportunity cost of putting a frequent flyer on a seat that otherwise couldn’t be sold drops close to zero).  What are the odds that there’s a recession in Canada between now and Air Canada fully ramping their own loyalty program? 

    §  Meanwhile, although Aeroplan is a viewed by those inside the industry as a well-designed, fully ramped loyalty program that stands up against any loyalty program managed inside US peer airlines, the current arrangement is inefficient and is not extracting the value that it should for the ecosystem as a whole (particularly AC).  Airlines should be pushing their loyalty program members onto seats they otherwise won’t/can’t sell (e.g., encouraging members to redeem miles during downturns and build them during upcycles).  Contrast this with the current contract with Aimia, where Air Canada is guaranteed ~$567.5mm of revenue (receiving more like $700mm of revenue), but is obligated to pay in excess of  $200mm to Aimia for services to administer its own frequent flyers (so, net ~$500mm of revenue) while also providing Aimia access to valuable inventory (i.e., seats AC could otherwise could sell to business travelers at extremely high rates – check out AC’s comments on the “billings” opportunity) and it’s not particularly hard to see why Air Canada sees the strategic importance of controlling their loyalty program.  In fact, I believe that while financial leverage explains part of the discount to US peers, the lack of a loyalty program likely explains the majority of the discount for AC (~6x P/E multiple vs US peers in excess of 10x), given the stabilizing/countercyclical dynamics articulated above.  As such, given the value creating opportunity on the table for AC, this is obviously a MAJOR area of focus for Rovinscu/Air Canada. 

    o   Build vs. Buy:   

    §  Air Canada has stated that they believe the NPV of building their own loyalty program is $2-2.5bn (ramping from zero in June of 2020) and would cost ~$85mm of capex between now and then.  They’ve also stated that they believe the difference between their EBITDAR margins and US peers of ~300bps is primarily due to the lack of a loyalty program, suggesting that they believe a fully ramped loyalty program is worth an incremental $500mm annually of EBITDAR, which is effectively stable cash flow to AC, given the lack of capex associated with a loyalty program and NOL’s at AC -- the $500mm EBITDAR uplift makes sense, given the $200mm’ish of cash Aimia currently generates, commensurate with opportunity in the cost structure at Aimia from the bloated corporate culture, unprofitable other businesses, etc., and billings uplift opportunity from being more efficient in terms of the seats that loyalty program members are allocated. 

    §  To the extent that Air Canada could quickly address the cost structure and efficiently address the billings opportunity, simplistically capping out the $500mm’ish of FCF for a fully ramped loyalty program at 10x, values a fully ramped loyalty program at ~$5bn to AC, or 80% of AC’s market cap, suggesting Air Canada could afford to pay $2.5bn for Aeroplan alone (excluding PLM) and be neutral to building it itself (keep in mind that the liability that travels with Aeroplan is not a real liability – in fact, its more like an asset in the sense that its the output of building 5mm members over multiple decades, particularly to Air Canada since they control the inventory – i.e., as noted above, they will be driving redemptions onto seats they otherwise won’t sell -- ratings agencies/credit markets are familiar with how to treat this balance sheet line item given that all of the US carriers have them sitting on their balance sheets).  That said, even if you want assume some cost for AC carrying the liability on its balance sheet (which would likely be revalued lower commensurate with any transaction), it’s pretty clear that buying Aeroplan at some price (I think $1-1.5bn x-PLM is reasonable) that implies substantially more value than the current AIM share price is obviously the superior outcome for all parties. 

    *As noted in a prior comment of ours, at a minimum AC should be willing to pay the NPV of the cash flow Aeroplan is poised to generate between now and June of 2020 plus the $85mm of capex they were going to spend between now and 2020 (as it would be NPV neutral to the value of building their own program and they would have zero ramp risk and keep all of the upside from addressing the cost/billings opportunity between now and 2020), suggesting Aimia is worth $7-8 per share in a low case (assuming $4-5 per share for PLM and making the converts whole). 

     

    o   Synergies (taxes, corporate, etc.) In addition to the aforementioned revenue/billings synergies, there are additional obvious synergies, which make a transaction that much more compelling.  Aimia should not have any corporate/business development/public company costs – it should be run by a mid-level manager in an airline.  Also, Air Canada is already incurring some costs for their  own loyalty program, which they started building out ahead  of the negotiation with Aimia.  Furthermore, Aimia is poised to become a full tax-payer, while AC is swimming in NOL’s.  


    SubjectRe: Re: Re: Aimia endgame?
    Entry01/02/2018 02:50 PM
    Memberhkup881

    I'll take a shot at these

    1) I struggle to believe how a strategic acquisition of Aimia by AC makes sense for the consumers.  AC guarantees access to 8% of the Air Canada inventory.  Based on latest FY sales of C$13bn, this represents C$1bn.  However, Aeroplan only paid AC $567, so there is a subsidy discount value of $507mm being transferred by AC to Aimia (which Aimia in turn provides part of that discount to its members).  Ultimately, AC wants to get rid of this discount.  However, if AC were to be remove this discount (regardless of whether Aimia is acquired or not), it would be to the detriment of Aimia members and potentially drive a bank run in this delicate situation.  How does a acquisition of Aimia resolve this core problem?   This is a loyalty program. NO ONE CARES WHAT THE CONSUMERS THINK. They just go with the flow and don't churn off no matter what you do to them. AC wants to increase its load factor, it has more levers to pull to do this when Aeroplan is inside of the entity, as opposed to straight discounting as they have now. There is also a LOT of fat at Aeroplan that can get cut, so that the overall consumer subsidy can decline and get consumers to a similar spot. You CANNOT ever have a run on the bank. I have a better chance of growing wings and flying. If AC owns Aeroplan, there is no one left to defect to and AC doesn't care if you defect as they are the only airline besides WestJet. AC buying AIM ensures that no one else gets the $1b of customer spend to subsidize their own flight programs. AC is still at huge risk here that AIM partners with WestJet or Porter or someone like that and guarantees them load so they can grow their fleet.

    2) Air Canada is now looking to set up their own co-brand card.  Given the concentrated banking market in Canada, there are not that many players to choose from.  Can CIBC/TD/AXP compete for this business or is there exclusivity?  Do you think AXP will renew with next year?  In a draconian (but not unfathomable scenario), the Aeroplan business has only a handful of accumulation partners and gross billing growth (cash flow) can go away or diminish fairly quickly if (a) AXP decides not to renew, (b) AC stops buying, (c) TD/CIBC begin migrating their customers to other cards (see Fenkell's posts; note I confirmed the same as well). My understanding is that AC doesn't have many options and will almost be forced to go with a 2nd tier bank like Bank of NovaScotia. Remember, the banks want to push their own internal loyalty programs as that is MUCH more lucrative than a co-branded card and don't want to have an AC program taking their own clients. AXP will renew b/c the cost of eating the liability basket to their own customers is too high. Banks almost NEVER exit a program. Instead, they try to slowly migrate members and strand the liability in the old program--yet another reason why the liability is grossly overstated. I 100% believe that AIM is not a long term hold as their long-term competitive position is crappy in the whole loyalty biz and I don't think there will be 200 bps of interchange for everyone to split going forward either.--hence the industry probably exists in a much less profitable position in 5-10 years anyway.  

    3) I read somewhere that the TD/CIBC contracts have minimum redemption values.  Any thoughts on the impact of this?  Has anyone seen the terms of the TD/CIBC agreements with AIMIA? There are minimum values, but AIM won't give any color. Based on my experience with US banks (Canadians mostly follow Americans on this stuff), we had minimums at our 2 programs, but since no 2 redemptions are exactly the same, there are a billion ways to move the redemption value around and not have the banks care. Basically, they can gate and devalue at will. Inside of AC, I suspect they would do the same but hide it with free upgrades and reduced luggage fees or whatever to make the net benefit seem better. In the end, the banks don't really care what happens to the consumers here. They just want their interchange fee and NIM on balances.  


    SubjectRe: Re: Aimia endgame?
    Entry01/02/2018 05:00 PM
    Memberxds68

    If AC bought AIM and didn't resume preferred dividend, can they issue dividends on the AC level, or dividend cash from AIM to parent? Doesn't the latter violate the spirit of the whole preferred seniority structure?

     

     

     


    SubjectRe: Re: Re: Aimia endgame?
    Entry01/02/2018 05:50 PM
    Memberxds68

    PS - related to the prior question of whether stranding the preferred is technically possible, do you have an example of a $5 bil market cap public company that has actually done something like this? It's unethical, and I'm not aware of any non-distressed large companies that have done it...don't think the optics are good and hard to see it inspiring a lot of investor confidence.

    That said, I haven't followed Canadian preferreds, so open to being corrected...


    SubjectRe: Re: Re: Re: Aimia endgame?
    Entry01/02/2018 06:20 PM
    Memberhkup881

    Not quite a stranding, but look at the VIC thread on MPG Office Trust INC from July 11, 2013. Brookfield basically stranded the pref or at least didn't pay accrued dividends of like $9/shr. If Brookfield can do it and they need to keep a clean image to get investors to buy their vehicles, why can't someone with sharp elbows do it??


    SubjectRe: Re: Re: Re: Re: Aimia endgame?
    Entry01/02/2018 07:36 PM
    Memberxds68

    I believe at the time Brookfield acquired mpg they tendered at par for the preferred, although maybe they didn’t honor accruals (see below). Also, my recollection is the renamed dtla is a cash break even situation as currently structured and mgt has indicated pref dividend will resume in a few years after major renovations are done and the entity has positive free cash. So it’s really not what you’re describing as plausible for AC - sharp elbows notwithstanding think its fairly low probability they would do this for both optics, liability, and limitations on future use of cash flow.

    The agreement also called for Brookfield to tender an offer to purchase all preferred shares of MPG stock at a price of $25. Any preferred shares not tendered would be converted into new preferred shares of Brookfield stock “with rights, terms and conditions substantially identical to the rights, terms and conditions of the outstanding preferred shares” of MPG stock. If more than two-thirds of the outstanding MPG preferred shares are tendered, then Brookfield will have the right to convert all of the untendered MPG preferred shares at the $25 tender price.


    SubjectRe: Re: Re: Re: Aimia endgame?
    Entry01/03/2018 09:04 AM
    MemberHamilton1757

    LuckyDog – a few thinks I’d add to Hkup881’s response to your first question re: the strategic rationale of an AC acquisition of Aeroplan by AC, which speaks to the “Billings opportunity” AC consistently cites as the largest driver of value in launchinig their own program.  This is due to the inefficiency of the current arrangement (i.e., although Aeroplan is a well-designed loyalty program, the airline and loyalty program aren’t collectively extracting the max value they should be). 

     

    ·         An example highlighted to us during our calls is that consumers tend to redeem their miles for leisure travel and, as such, tend to book their flights well in advance (therefore, they are inherently more flexible).  This consumer might not care (or even notice) if they are on a 5pm Friday evening flight (that is far more valuable to AC due to their ability to sell it to a non-price sensitive business traveler looking to make it home on time for dinner a week in advance at a $1,000 per ticket) or a flight a few hours earlier on a flight thats likely to not be filled, but due to the current capacity arrangement AC is putting these mileage redeemers on the 5pm high value seats.  Said differently, and the hkupps point, nobody will notice slight changes to the program and AC will still be able to make the redemption miles on seats they otherwise weren’t going to sell look like an attractive value proposition to the consumer when the loyalty program is fully integrated with their yield management system.

     

     

    With respect to AC purchasing Aeroplan/Aimia being a better outcome for the consumer, keep in mind that the aforementioned capacity arrangement is dead regardless.  Thus, the consumer is currently left with an aeroplan program that has an uncertain value proposition.  While it’s certainly conceivable (perhaps even likely) that Aeroplan is able to develop other redemption options, etc that provide substantial value to the consumer, given that many consumers associate Aeroplan with AC, I think the consumer would generally be relieved to not have to make a choice re: their current front of wallet card (I’d also imagine AC will spin it as a massive positive/opportunity to better serve/improve the offering to their customer, etc, etc.). 


    SubjectRe: Re: Re: Re: Re: Aimia endgame?
    Entry01/03/2018 10:29 AM
    Memberdd12

    LuckyDog, you referred to the subsidy discount as being $507M, that is too high -- Aeroplan pays AC over $700M per year, and the subsidy they receive from AC is around $250M.  this subsidy has wrought inefficiencies and other undesirable conditions, as subsidies tend to do.

    1)  this company is fatter than fat, i mean orca fat.  it's absurd.  they say they can cut $70M of OpEX and i will take the over

    2)  to Hamilton1757's point, there will be changes made to the program that will go largely unnoticed by their customers ... at least the important ones

    3)  Aeroplan runs at 11% breakage.  Air Miles runs at 20%, which is down from 26% since their failed attempt at points expiration.  the delta is largely owed to the two programs' differing customer / redemption profile.  i don't think that this is a red line.  Aeroplan moved down from an 18% breakage rate in 2013, when the 10-year deals with TD/CIBC were signed, to reflect the enhancements to the program.  well, the program will be not be enhanced by the 2020 AC expiration, that qualifies as a deterioration

    i don't anticipate much of a change, but as Aeroplan's redemption options evolve, there are small levers to pull that will have material impacts on on EBITDA.  again, the last thing they want to do is piss off their high value customers who like their AC flights.  i'm just saying there is wiggle room here, around the edges.

    4)  Aeroplan less other operations and corporate will generate $200M of free cash flow (about $20M of the holdco-level $220M of free cash flow they quote comes from PLM distributions).  call it $250M of lost EBITDA to the AC expiration.  they make $70M of that back on costs, i consider that in the bag.  add another $50M on program tweaks and in 2020 they end up with a pile of net cash, a PLM stake, and a $70M free cash flow biz into perpetuity.  that is the downside case, i believe.


    SubjectPotential spinoff
    Entry01/03/2018 01:58 PM
    MemberMason

    Is there a way to spinoff Aeroplan and other hefty liabilities on the balance sheet by an activist to monetize other valuable stakes and programs Aimia have or would it be legally impossible with potential covenants/ change of control and pari passu issues if they go illiquid? 


    SubjectRe: Potential spinoff
    Entry01/04/2018 09:34 AM
    MemberHamilton1757

    There are a number of paths to disentangling assets/liabilities, collapsing debt, etc.


    SubjectThe Next Crypto Coin??
    Entry01/10/2018 01:13 PM
    Memberhkup881

    I am not an expert on blockchain. I'm net even a sorta expert. If you called me a blockchain idiot, I wouldn't disagree with you...

    With that disclosure out of the way, I feel pretty confident in saying that at some point in the next 5-10 years, Aeroplan points will be on a blockchain and be available to buy/sell/trade/gift/etc. This is because the blockchain will make it substantially cheaper to process and manage these liabilities for AIM, which lowers costs while increasing customer satisfaction.

    After the KODK insanity bubble of yesterday (KODK is now a leading edge tech stock???) and having seen BURG create Hooter's loyalty program coins (huge stock explosion as well), I am pretty confident in saying that if AIM comes out with a similar PR to BURG or even something completely innocuous along the lines of "We're researching how to put Aeroplan points on a blockchain to improve the customer experience. We will have more data as we advance in this process" our AIM shares will trade into the double digits and we can all go celebrate somewhere.

    I'm not an activist, but I see an opportunity when one exists. A lot of you own shares of AIM. Email Karen Keyes at IR Karen.Keyes@aimia.com and let her know that you'd like a public update on the activities that AIM is doing in blockchain for payments and if they're not at least researching this, they should all be fired.

    I already emailed and was told that other people have already demanded an update (guess I'm not that crafty afterall). I think if they get more similar questions/requests, we may get a very pleasant PR update.


    SubjectFound Money
    Entry01/12/2018 05:11 PM
    Memberdd12

    Cardlytics filed an S-1, proposed pricing not included.  Aimia owns 11.9M shares (21%) alongside Canaan Partners, Polaris Venture Partners, Discovery Capital and FIS ($32B market cap).

    business is growing, I haven't looked into comps yet or how to value it, just know it's going public.

    From what I can tell, AIM was carring this at $26M (cost method), and I am quite certain the market values it at zero.  PLM and now this, I guess they aren't terrible investors afterall.

    https://www.sec.gov/Archives/edgar/data/1666071/000119312518010003/d338035ds1.htm

     


    SubjectRe: Re: Found Money
    Entry01/12/2018 05:54 PM
    Memberdd12

    $32B mkt cap is Fidelity National (FIS), they are also investors in Cardlytics.  the point is there is real sponsorship behind this IPO.


    SubjectPLM
    Entry01/17/2018 01:33 PM
    Memberruby831

    Some very robust Q&A and a great writeup hkup. Question -- where do we see the EBITDA run-rate for PLM? AIM reports cash distributions and that number wasn't huge YTD or in FY 16 ($13mm and $18mm CAD respectively). I see that AIM put in their deck that YTD, Club Premiere did >$70mm in CAD EBITDA (so even taking 49% means 37% of EBITDA converts to cash?). Unclear why the conversion from EBITDA to cash availible for distribution is seemingly low -- any thoughts? Just trying to use some other availible financials to back into something here.

     

    As a second point, Aeromexico made it clear in its Sept '17 investor day and on its Q2 '17 earnings call that it doesn't want to IPO or spin shares because it believes ownership of the program is key. So does that mean AIM's only exit is to sell to Aeromexico and would Aeromexico have a desire to pay 10x when their multiple 'seems' to stink.

    I think this could be an awesome idea -- just want to better understand the underwriting behind PLM's valuation of 10x $100mm of EBITDA (@ 48.9% ownership).


    SubjectRe: PLM
    Entry01/18/2018 10:41 AM
    Memberhkup881

    Ruby831- I'm using the EBITDA run-rate numbers from the quarterly presentations. Keep in mind that those are reported in USD and you need to convert to CAD.

    I don't know why the conversion rate to cash is so low, as there aren't enough details here to figure it out. In theory, cash build should be higher than EBITDA. One option is they're paying some of the initial redemption basket reward up-front and then get to amortize it out the back. We just don't have enough data to know.

    I don't think Aeromexico will be the buyer of the half they don't own. I think it would be PE or best left to the market to float it with a management team of 1 that owns the stake. I think the market will value it much higher than Aeromexico or even PE would. I really think 10x EBITDA is conservative given how fast it's growing and the runway in Mexico. It could easily be 15-20x and no one would think that was crazy....

    The point is that between the PLM stake, the Cardlytics stake and the cash build, there's a LOT of value here, even excluding the loyalty programs (that have real value too).


    SubjectRe: Re: PLM
    Entry01/18/2018 11:39 AM
    Memberruby831

    Thanks hkup -- just not sure how it gets floated if Aeromexico is keen on not doing it. Let me know if I'm missing something. Also cash distributions were down in FY '16 ($13.7mm USD) versus FY '15 ($20.5mm USD) -- any idea why PLM did worse in 

     

    Aeromexico Investor Day Call (9.26.17)

     

     

    <Q>: Hi. It's Cathy O'Brien from DB How does what's going on with AIMIA impact your

    loyalty program? And have you been in any discussions with them and how does this go forward?

     

    <A - Andrés Conesa Labastida>: Since probably what, maybe two or three years ago, not necessarily recently, we made very clear and we've been very open in the sense that we are not thinking about doing an IPO for PLM. And AIMIA is our partner in PLM. We believe this is strategic for us. The loyalty program is probably one of the key components of our business model going forward and also Delta's position in this is different. They believe that this coalition type of programs, not necessarily [ph] they are bad (01:23:04), but then you need to have full control of your program. And today, by having 51% and they own 49%, doing an IPO, we would lose control and we will never allow that to happen.

     

    So, they've been great partners. We've been working with them for the past six years, and really, they have engaged. But, again, we firmly believe – and conditions change. Six, seven years ago, where we were in trends, it was right after when we got the amendment with them after the crisis of 2008, after the swine flu crisis of 2009. So, we were in a different position, and again, things have worked very well. The program has been performing very well. But we will never in our business model allow to lose control of that. So, we will keep – anything that we move, the top priority is to have, I mean, full control on the program.

     

    Aeromexico Q2 2017 Earnings Call (7.19.17)

     

    <Q - Mauricio Martinez Vallejo>: Hey. Good morning, everyone, and thank you for taking my questions. I have the questions. The first one would be regarding the recent challenges faced by Aimia in Canada. Are you planning any kind of offering or spin-off of PLM similar to what was done with Smiles a few years ago?

     

     

    <A - Andrés Conesa Labastida>: Hi, Mauricio. No, we've analyzed this point in the past couple of years. We've been thinking all of our possibility and we basically have ruled out any possibility of doing a spin-off of our PLM.  We think it's very important for us, it's key. Loyalty, it's a very important part of our business model, so we will continue – not to – to make sure that we have full control of our loyalty, the loyalty aspect of the value proposition we offered. So it's basically ruled out in any spin-off of PLM.

     


    SubjectRe: Re: Re: PLM
    Entry01/18/2018 01:32 PM
    Memberhkup881

    That doesnt mean that AIM wont spin it off. Or that AIM wont sell Aeroplan to AC and end up with PLM as the main residual asset inside of AIM...

     

    I dont have any answers on your cash distributions question.


    SubjectAIMIA sells Nectar to Sainsbury
    Entry02/01/2018 09:12 AM
    Memberpcm983

    Well it follows management's guidance to streamline the company and reduce headcount.. Could it be that they want to strip out the extraneous assets now to make a takeover by Air Canada more attractive?


    SubjectRe: AIMIA sells Nectar to Sainsbury
    Entry02/01/2018 10:29 AM
    Memberxds68

    I missed the call on this, but on the surface it seems like an awful transaction, and market seems to be reacting that way - they are basically paying Sainsbury close to 200 mil to remove a 200 mil reserve (effectively getting nothing), and your earlier comments would suggest the reserve was conservative on absolute dollars and very conservative on a PV basis - was the business losing a significant amount of money? Short of that, doesn't make sense. I know the consensus is management isn't the best here, but this seems to set a new bar - what am I missing?


    SubjectRe: Re: Re: AIMIA sells Nectar to Sainsbury
    Entry02/01/2018 10:42 AM
    Memberxds68

    I'm hoping there's some plausible rationale. Making it worse, I believe they announced the transaction at 6am in the middle of earnings season, and then held a 8:30 am conference call, and didn't post information on a replay. How many people realistically are going to participate in that call? 


    SubjectRe: Re: Re: AIMIA sells Nectar to Sainsbury
    Entry02/01/2018 10:43 AM
    Memberhkup881

    Could someone in management be short the stock?? I have no other explanation for today's deal. They could have closed down Nectar and come out ahead. I know this is possible b/c we closed down multiple programs and gave loyalty members squatola. You cannot sell a program for less than the transfered cash balance. It's asinine.

    They're litterally sitting up there, watching hockey and drinking Molson's or whatever it is that Canadians do when they're having a bonfire with shareholder equity. The winter must have gotten to their brains.

    These guys need to be fired and FAST!!!

    Who wants to lead the charge?? 


    SubjectRe: Re: Re: Re: AIMIA sells Nectar to Sainsbury
    Entry02/01/2018 11:02 AM
    Memberhkup881

    If they were to put Nectar into run-off, they would need to have at least 16.4% of card holders not redeem to come out ahead--even excluding the expected cash flow during the remainder of the program. 174m net cash transfered/ 208m Nectar reserve.

    When Air Miles tried to put their business into run-off, 40% of card holders did not redeem.

    This really is the worst corporate transaction in my 20 years investing in stocks


    SubjectRe: Re: Re: Re: Re: AIMIA sells Nectar to Sainsbury
    Entry02/01/2018 11:29 AM
    Memberxds68

    On the conf call their main arguments (as I understood them at least) were:

    1) Shopping is more liquid redemption than travel, so more of the reserve was going to be redeemed

    2) Sainsbury was, or perhaps would eventually, create cannibalization in the rest of the international business, and without them it will be easier to add partners. Maybe if you want to put a best face on this, they also think it frees them up more in the Aeroplan business?

    3) Business represented a management distraction for no growth business (this seemed to be more of a throwaway)

    And then there is the general sense that they really want to work down the required reserve and this moves that forward. I'm not clear on the urgency there. 

    Caller pointed out the seeming inanity of basically giving away a cash generative business, to which management gave some boiler plate answer about it being the best option having conducted thorough review. Appears RBC has advised on both this deal and the air miles sale. Mgt said more financial color with quarterly results in two weeks.

     

     


    SubjectRe: Re: Re: Re: Re: Re: AIMIA sells Nectar to Sainsbury
    Entry02/01/2018 11:52 AM
    Memberpcm983

    The caller pointing out the inanity of giving away a cash generative business bought 10% of the company last summer and is active on this board here.  Maybe they have some further thoughts on the sale as well. I did notice they asked about board approval and the advice from RBC so with the annual meeting in April, it might be that faith in management will be tested if the results of this transaction are mediocre.

    I don't totally disregard the idea that their comments about focusing on aeroplan are because AC told management they won't acquire unless they strip out the non-airline assets.  Not that this would be the wisest idea for aimia shareholders, but i think it's been established that they aren't exactly the best management team out there. 


    SubjectThesis Killer?
    Entry02/01/2018 01:52 PM
    Memberstraw1023

    I am new to the situation so forgive if these are stupid thoughts/questions. It seems to me that the core long thesis was:

    - Existing point liabilities are not "real" in the sense that AIMIA can control the true redemption value

    - the rate of points not used increases as programs die

    --

    This all makes sense to me, but then as you have noted, the Nectar transaction makes zero sense. Zero.

     

    So several questions:

    - Is it possible that management does not understand reality? They do not understand their flexibility in setting the redemption terms and conditions.

    - Is it possible that management does not care about shareholders and is making decisions for benefit of employees? I was struck by the repeated language on the call about "all stakeholders" and employees and this nonsense about "optimal risk-adjusted outcome." Sure, we hear this all the time, but it seemed much too frequent here.

    - Now for substantive question: Is it possible that AIMIA flexibility with respect to Nectar was far less than you are suggesting it is with Aeroplan? In other words, was AIMIA required to maintain a certain absolute value of redemption, etc.? Is it possible that Nectar had an agreement with Sainsbury that made these liabilities very real? Is it possible that this same sort of language is in Aeroplan?

    It seems to me that the best hope of longs at this point is that there was something substantively different about Nectar in this regard. If AIMIA's flexibility with respect to Nectar was limited and the program was going to die and become negative free cash flow, the transaction may make sense.

    But if management is really as ignorant or as anti-shareholder as this appears on its face, this seems like a thesis killer even if your underlying understanding of the Aeroplan business is correct.


    SubjectRe: Thesis Killer?
    Entry02/01/2018 02:25 PM
    Memberstraw1023

    fwiw, with no knowledge of Nectar agreements with Sainsbury (before yesterday's sale), I am inclined to believe there is something that restricted AIMIA's flexibility in Nectar and made the liabilities very real. I cannot believe that management would be this stupid or this anti-shareholder. It is too extreme. It makes me think that there is something in the Nectar program that prevented a run-off or lowering of redemption value of points.

    Based on the history, it seems plausible that Nectar would be structured differently. But I am throwing out guesses.


    SubjectRe: Thesis Killer?
    Entry02/01/2018 02:27 PM
    Memberxds68

    So in 3Q Sainsbury's was 13.4% of $418.4 global billings, or $56 million with international division EBITDA margin of 8.5%, but figure Sainsbury's was a little higher than avg division, so 10%, $5.6 mil EBITDA in quarter, $22 mil annualized. How much of the business is fixed vs. variable? Because on a $200 million Sainsbury's annual revenue base declining 10% or more a year, if there's a large fixed componenet, you're at EBITDA breakeven within a couple years. If you combine that with the reserve requirement and distraction element, maybe there was a plausible case that it was better to get rid of. If I was on the board I would still argue not to do it because if nothing else the optics are terrible, but maybe the economics weren't so one sided against.

    As far as running off, you have to think Sainsbury's had some protection against this, and even if they didn't, management still appears to be hoping to grow the ex-Sainsbury's piece of this business, and putting your partner's loyalty program into runoff against their wishes might not play well to other prospective partners. This strikes me as fundamentally different from a situation where your loyalty partner (AC) has completely terminated the agreement.

    My very anecdotal impression just from listening to a few calls is management is not fundamentally "ignorant or anti-shareholder", but agree this is a tough development to feel totally comfortable with.


    SubjectRe: Re: Re: Thesis Killer?
    Entry02/01/2018 03:30 PM
    Memberstraw1023

    hk,

    why are you certain that Nectar had flexibility to put into "run off" as you are describing?  Surely, nectar had a contract with Sainsbury that may have restricted what Nectar could and could not do. Is this agreement public? Has mgmt ever described it?

     

    I agree with your assessment about run-off so the key question to me is whether they had that flexibility. Or was there something in the Sainsbury-Nectar agreement (prior to purchase) that meant that Sainsbury had AIMIA by the short hairs? To me, this is the key question. 

     

    You keep assuming that Nectar had full flexibility, but I am challenging that assumption. 


    SubjectRe: Re: Re: Thesis Killer?
    Entry02/01/2018 03:45 PM
    Memberxds68

    Does it put them in better position to just redeem all the debt when the Senior Secured matures in May 2019? They could argue that if they pay off all debt at that time, they are less under-reserved.

     


    SubjectRe: Re: Re: Re: Thesis Killer?
    Entry02/01/2018 03:50 PM
    Memberhkup881

    Straw1023-feel free to challenge as I'm quite baffled here...

    This is a coalition with multiple earn/redemption partners. Nectar's shareholders own the program, not Sainsbury. If Sainsbury leaves the program, they simply leave. They've paid their fair share into the program to purchase points for their members and those points have transfered to the members (cash to the program manager). Sainsubry now has no further cost for points that are redeemed as the points are owned by the members and get redeemed at stores with an offsetting cash disbursement from the program manager to offset the cost of the goods. Anyone can enter or leave the program based on contract terms. Sainsbury did not own the program, they were simply by far the largest member of the program.

    This is very much like Blue Chip Stamps. Over time, it went into run-off as spend and redemption partners left, which left fewer redemption options and stranded the points.

    This is VERY different from an in-house co-branded program where there is only a single spend/redemption partner and a financial partner and there are more strict terms about card values. Even in this sort of program, you can still gate/devalue.

     


    SubjectRe: Re: Re: Re: Re: Thesis Killer?
    Entry02/01/2018 04:07 PM
    Memberpuppyeh

    didnt straw hit the nail on the head: unless there is substantive proof that the Aeroplan contract w/ AC is meaningfully different than the Nectar one w/ Sainsbury then isn't it impossible to be long anymore? i tend to agree that no one is stupid enough to do this nectar deal if the facts are as we collectively understand them (not even this board)...does anyone know if there are any public disclosures around either the Nectar or the Aeroplan contract that specifically outlines whether Aimia can control redemption rates at their sole discretion, etc?

    a couple of other Qs: this transaction seems meaningful enough to a company's Aimia's size to demand a shareholder vote (which, if so, could then be vetoed, with enough public outcry, no?) i am not a Canada expert re shareholder rights, etc, so any help appreciated.

    the only other explanation I can think of is they were deathly afraid to change redemption terms of this program (in their favour) while they are still negotiating with new partners on the Aeroplan deal - ie they figured it was better to cede a limb than risk the whole body...but even then I don't understand why they had to sell it on these terms (again, we would need to see the contract to understand exactly why).

     


    SubjectRe: Re: Re: Re: Re: Re: Thesis Killer?
    Entry02/01/2018 04:22 PM
    Memberhkup881

    I don't have the agreement so I'm just guessing here, but the worst case possible scenario is that they're on the hook for $230m of redemption liability (from the CC). By selling for -$174m, they saved $56m if the worst case happens and 100% of cardholders redeem, and maybe it saves them a bit more money to manage an unprofitable program as there are costs to fire people and whatnot.

    I am not trying to make the case that AIM could gate/devalue here and get a better deal. I'm trying to say that they can do nothing, fully honor the program and let it run off and come out better.

    I understand the logic that if this program goes into run-off, there is a fear that Aeroplan cardholders could have a run on the bank for fear that AIM does the same to Aeroplan, but 99% of Aeroplan cardholders have never heard of Nectar.


    SubjectRe: Re: Re: Re: Re: Re: Re: Thesis Killer?
    Entry02/01/2018 04:25 PM
    Memberdd12

    yes, i agree.  this move is beyond baffling.  it's like selling a stock that trades at net cash, doesn't burn cash, because you're tired of seeing it on your brokerage statement.  even if we've all done it at some point, that doesn't make this any less stupid.


    SubjectTrying to Apply Logic to Canadian Corporate Incompetence
    Entry02/01/2018 04:44 PM
    Memberhkup881

    Ok, market is closed. Deep breath...

    This is how I'm sort of thinking that they rationalized it internally.

    -Sainsbury told them that they're walking in 2019 and therefore the program has minimal value in a sale to someone else

    -Running a sub-scale plan with all the employees and all the termination costs would have been a cash drain for some time until they could right-size it

    -They could have put it into quasi-run-off, but were worried about the precedent it would set for Aeroplan

    -There was $230m of liability. Assuming $10m incremental cash flow before Sainsbury termination is more than used up by employee severence during downsizing, you have $230+ of liability outstanding. If redemptions turn out to be 75%, you pay out $174m over time anyway, and it takes time to muddle through, you don't have to deal with the expenses of downsizing and the reputational issues involved in getting rid of so many people, you come to the same place with a lot less headaches and awful comps that you have to explain each quarter for years into the future as it goes into run-off.

    -In your head, you only think the pay-out ratio is 50%, but that's $57m of delta and you're a Canadian CEO who doesn't care about shareholders, so better to just get it done with and not worry about $57m when you can more than make that back by focusing your energy on Aeroplan which is 100% going to be a boondoggle sometime around 2019-2022 period. Of course, a gate/devalue program probably reduces this payout ratio well below 50%, but you don't own any shares and maybe the board will strike your stock options with the stock in the hole, right after Q4 earnings and the black-out period is over

    I know, it sucks, but it's not insane logic. It's just Canadian CEO logic. It could be worse, they could be exploring for lithium or something.

    I never put any value on Nectar in my sum of the parts. I just assumed it would have a positive value over time, even in slow-motion decay. I 100% put a value on the $174m of cash that was given away. This detracts over $1/shr from fair value but it shouldn't change the overall fact that the shares are extremely undervalued.

    What it does change is the fact that management cannot be trusted to do the right thing and is liable to dump the crown jewel, which is PLM at some insane value.

    Therefore, it needs adult supervision here for us to realize any value.


    SubjectRe: Re: Re: Re: Re: Thesis Killer?
    Entry02/01/2018 04:47 PM
    Memberstraw1023

    hk, You may be correct. I am trying to figure out some way that this transaction is not absurd, but it may be as absurd as it appears.

    I have two basic challenges to your arguments.

    1) I do not think you can simply compare net cash (paying $174mm = $183mm + $96mm - $105mm) to the Nectar Reserve ($208mm). The reason is the $96mm of negative net working capital. This is real. Much of this is seasonal and was going to be a large cash outlay in Q1 anyhow. And in the event of a quick run-off, that net working capital is coiming out of cash flow. It is probably extreme in the other direction to subtract out the entire $96mm and compare $78mm (i.e. $183mm - $105mm) to $208mm, but I believe this is closer to what they are paying to get rid of liabilities in a run-off scenario.

     

    2) I am also questioning your assumption that they can "gate and devalue" at will. What is in that contract when Sainsbury became part of program? As I read through your comments, you are assuming that the program oeprator (Nectar) had the same flexibility as Blue Chip (and other programs you have discussed) but I am questioning that assumption. Why couldn't Sainsbury have demanded (and received) a contractual clause that restricted Nectar's ability to "gate and devalue"?

    Here is the scenario I see playing out:

    - Sainsbury goes to Nectar and says they are finished with the program unless they can buy Nectar.

    - You are assuming that Nectar says "see you later" and worst case stops issuing new points and severly devalues existing points such that no-redemption % soars and redeemed points buy a fraction of current value. The working capital unwinds quickly ($96mm) but in this case, the real value of redemption on the reserves would be a pittance. So paying the $78mm was absurd.

    - But what if there is something in the Sainsbury agreement when they entered Nectar program that prevents this devaluing of points? Is it possible Nectar was prevented from de-valuing the points and that if Sainsbury pulled out, Nectar would die quickly . . . and the $96mm of net working capital would unwind quickly and the redemption on existing reserves would be 50% (or about $100mm). In this case, the deal looks reasonable and the question is whether there are any similar provisions with Aeroplan and Air Canada.

    Your core assumption is that the agreement between Nectar and Sainsbury (before this transaction) was the same that Blue Chip and other programs had with their members. I am just questioning whether that is correct here.


    SubjectRe: Re: Re: Re: Re: Re: Thesis Killer?
    Entry02/01/2018 05:09 PM
    Memberhkup881

    Ignore gate/devalue here. That can come later. Its much simpler really.

    Sainsbury leaves in 2019 and there are still millions of Nectar members who now are earning far fewer points as Sainsbury was the biggest player in the program, they are also spending far less as there are fewer redemption options. Therefore, program velocity slows dramatically. The net result is that a lot of points get stranded as people arent earning as fast and forget about the program—especially as there are fewer attractive redemption options. 

    You effectively strand points and get to a Blue Chip Stamps scenario over time. With fewer redemption options, the points arent as valuable to people and effectively strand. 100% of programs in history have eventually gone to this end point—much like 100% of paper currencies eventually devalue. I dont know what could make this program different unless Sainsbury could force AIM to buy back all the liability for cash or something, but it’s prohibitively difficult to offer millions of cardholders $0-$100 each and would never have ended up in the agreement. The liability is between Nectar and the members, not between Sainsbury and Nectar or AIM

    BTW-your working capital argument makes sense and means they likely paid well less than 75% on the dollar to eliminate the liability, making my point #120 numbers seem more favorable towards management as their alternative option was likely less than the $57m delta.

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Thesis Killer?
    Entry02/01/2018 05:13 PM
    Memberstraw1023

    I do not think this is correct (i.e. that worst case scenario is that they are on the hook for $230m of redemption liability) because it does not include the net working capital unwind of $96mm. Again, I do not hink you can compare the $174mm (which includes the $96mm for WC) and the redemption resevere ($208mm) or total redemption liability ($230mm). I could be wrong and welcome pushback.

     

    One other item of note is that the Nectar program has almost all the net working capital difference and that the Aeroplan program does not seem to have a mis-match. There must be a slight difference on the AR/AP timing between the two programs that creates a lot more float in the Nectar program.

     

     


    Subjectlpartners
    Entry02/01/2018 05:20 PM
    Memberstraw1023

    Thank you for your post. This makes a lot of sense and at first blush makes this a lot less bearish than feared. It is still painful to write a check for $173mm for something you thought was worth a few cash flows . . . but it seems to suggest that the core thesis concerning Aeroplan is not dead and that management is not hopelessly stupid or corrupt. I do wish they had described some of these factors on the call.


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Thesis Killer?
    Entry02/02/2018 02:08 PM
    Memberxds68

    So we're now down roughly 50% on the equity and roughly 30% on the preferred since the announcement, not all that far from the bottom when people were envisioning a run on the bank - I suppose they gave up roughly $1 per share in cash and 10% of EBITDA, so maybe the reaction is sort of justified if you believed that we were at more or less fair value, although they have generated a lot of that cash over the last nine months and will report more this quarter - or is there something else going on? I'm guessing there is now real fear another partner drops off, although my sense is that is unlikely with the remaining financial partners. But as is often the case with these situations, I'm now wondering if I'm the fool at the table...

    Just kind of mulling over how much things have fundamentally changed at this point...

    Thoughts?


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Re: Thesis Killer?
    Entry02/02/2018 04:29 PM
    Memberstraw1023

    I think the question here is simple:

     

    - if you think that the Aeroplan program has same rapid unwind potential as management feared Nectar had, then stock is worthless.

    - if you think that the Aeroplan program is different along the lines of write-up's core thesis, then stock is cheaper than ever. The upside is now worth $1.50 less due to unexpected result in Nectar, but on a probablistic basis, much lower probablity of upside now priced into stock.

    Several of the comments on the Seeking Alpha article (see lpartners comment in thread) tackle the issue of why each program has its own endgame. The game-theoretic positions are very different from program to program. This does cast some doubt on hk's original thesis in suggesting that all these programs are resilient. But the characteristics of the Aeroplan program (esp credit card support; nature of redemption; ability to devalue) seem to suggest that a fast unwind without ability to gate/devalue are much less likely here than Nectar.

    I think this is still a lottery ticket but a very cheaply priced lottery ticket. I think stock has priced in a high probablity of a zero. Too high.

    We were buyers today. But let's be clear: this is not a large position. There is clearly risk. Who knows what is in that Aeroplan/Air Canada contract.


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Thesis Killer?
    Entry02/02/2018 05:00 PM
    Memberxds68

     

    Thanks, I just don't see how you can get a rapid unwind on air miles given the limiting factors of time and money. Seems quite different from grocery redemption points. I do worry if there were more partner losses you could begin to get mismatches between billings and redemptions, but my assumption is there is a one to two year time lag on redemptions that would normalize with billings over time, and there is probably enough liquidity to buffer that period - 

    On the $2 billion accumulated liability, has there been any estimate of how much of that is essentially abandoned/stranded miles? I am assuming that reflects accumulated breakage over many years - is this accurate?

    seems to me there are scenarios where the preferred has some value even where the common is worth more or less what its worth today.I calculate company should have roughly $1 billion of liquidity including PLM net of debt by 2020 - hard for me to see how that doesn't leave some liquidity for preferred, although maybe the reality is if the common dies the preferred dies with it. But I'm still hard pressed to see it (worthless preferred).

    That said, was very very tempted (literally a keystroke away) from just washing my hands of the whole mess today, but decided to sleep on it. 

     

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Thesis Killer?
    Entry02/02/2018 06:20 PM
    Memberdd12

    yes, the $2B liability builds in breakage, which is why it is lower than deferred revenue on the balance sheet.

    during 2Q'13, they took the breakage on Aeroplan from 18% to 12% to "increase engagement" in anticipation of the new TD/CIBC credit card deal.  this increased the Aimia consolidated redemption liability from $1.3B to $1.8B instantly, 1Q'13 to 2Q'13.  unlike Nectar, this liability is flexible, to say the least.


    Subjectdd question on your estimates
    Entry02/02/2018 06:55 PM
    Memberxds68

    you mentioned 250 mil ebitda headwind from ac, but isn’t that only the subsidy and there’s the lost 300 mil +billings times some margin? Plus now lost nectar ebitda?

    seems like even w cost cuts breakage needs to rise to teens to bridge the gap?

    sorry if this has been discussed already


    SubjectRe: dd question on your estimates
    Entry02/02/2018 10:16 PM
    Memberxds68

    Never mind I reread the thread and saw your earlier estimates as well as mpk’s model.


    SubjectCurrent Valuation
    Entry02/04/2018 12:53 PM
    Memberhkup881

    Ever since Thursday's PR and botched conference call, I've been going through the 7 stages of grief (shock & denial, pain, anger, depression, upward turn, working through, acceptance and hope). I think I'm somewhere between stages 5 and 7 now and there seems to be something of an ad hoc VIC self-help group that's helped everyone through this process (there's like a dozen of us). In any case, while I think this transaction is moronic and should form the backbone of any HBS case-study on why no one should invest in Canadian companies, I understand the logic of not putting the program into run-off while you're negotiating new loyalty partners for your cornerstone Aeroplan program, but I'd like to have seen a bit more of a backbone in terms of negotiating this debacle. It sets a bad precedent for future difficult negotiations and the banks have clearly lost faith in management here (not a good sign).

    In any case, I'd like to update my NAV as it's been a while since my original write-up and a lot of new data has come out since then. I intend to solve for the value on the date that the AC agreement ends and this is something of a cash flow statement until then.

    All numbers are in millions of CAD

    Pro-Forma Q3 Cash - 395

    Q4 Cash Build - 120

    2018 Cash Build - 240 (220 of 2017 guidance offset by -30 for Nektar and +50 for cost savings)

    2019 Cash Build - 250 (220 of 2017 guidance offset by -30 for Nektar and +60 for cost savings)

    2020 Cash Build - negative 50 (Normal seasonality and 90 cash draw from increased redemptions at Aeroplan)

    Total 2020 Cash 955

    Cardlytics Value - $50 (IPO in Feb and based on mid-point of range converted to CAD and can be monetized end of 2018 if needed)

    PLM Value - 625 (49% ownership of USD $100m in 2020 EBITDA at 10x and convert to CAD at 0.80)

    AIM International Software - 100 (Blind Guess)

    Other Legacy Assets - 25

    Total Non-Cash Assets - 800

    Total Assets - 1755

    Cash Liabilities

    Revolver - 108

    Senior Secured - 250

    Total Cash Liabilities -358

    Net Cash - 597

    Net Assets - 1397

    Shares - 152

    Net Assets Per Share - 9.19

    Ok, now for comments on the above, I know I ignored the pension of 98 and perf of 323. If you want to include them, you get $421m more liabilities and subtract $2.77 a share from NAV to end up at $6.42. I tend to think that the Perf is stranded and a $13m cost on top of a future business, while the pension is also likely to be a recurring cost in a solvent business and some may have shifted away with the Nektar sale, but feel free to include them. Basically, this is a SOTP that assumes AIM does not become a liquidation, but a scaled down company.

    As for Aeroplan redemption increases in 2019 and 2020, you can read all my comments. This will be a cost, I just don't think it is a massive cost (though could be proven wrong). I've basically built in $90m of cash redemptions in 2020 and assume that 2018/2019 cash flow do not increase from the base-line outside of cost cuts, when we know that spend has increased in 2017 and likely will continue to increase at some multiple on Canadian GDP growth. I also think that the cost cutting number is conservative here as they just chopped off most of the international operations. Additionally, as the revolver is rapidly paid down, follwed by the senior secured, net interest cost should drop by a few million per quarter along with some other bits of upside.

    Even if redemptions come in higher than $90m, there should be $597m of net cash to cover $2b of redemptions, which should be more than sufficient at 30% coverage, especially if Cardlytics and global software are monetized for added cash.

    I have assumed no value for the remaining Aeroplan business, which likely has substantial value, even with a much smaller card base. I don't see why residual Aeroplan isn't doing $100m of cash flow, before $70m of corporate savings ($170m total). Even if you think residual Aeroplan is ONLY DOING $50m of cash flow in 2021, at 7x for a shrinking program, you still get $350m of value or more than $2 per share in added value. (At $170m you get $1.19b or $7.82 in additional value to my NAV). Somewhere between the 2 is the actual number.

    Basically, I don't see how you get hurt here, though management may find a way still...

    Discount incompetence at some adequate rate and the shares in the low $2's are still quite cheap.

     

     

     


    SubjectRe: Current Valuation
    Entry02/04/2018 04:22 PM
    Memberxds68

    Thanks for the update. Agree on the negotiation. This seems to be an area of some weakness.

    Did they announce the length of the Amex renewal? Do we have to worry at all about that going fwd? Also, any idea who the ‘other’ category partners are? Cumulatively it’s pretty large. 

    Also, you mentioned in an earlier post the CEO anticipating a Aeroplan boondoggle in 2019? Also you mentioned some concern that AC turns predatory and wrecks Aimia w PR - any more thoughts there? I don’t know how realistic this is but my thought is there are 2 plausible defenses 1) buy from AC so they’re nice, or 2) strike a good partnership with other airline so it’s less important. Hopefully it’s two so we can all sell and go home.

    On the cash flow from Nectar, what are you assuming for ebitda? If mid to high 30s, maybe free cash was mid 20s after cap ex, and hopefully shared service can also be slightly reduced.

     


    SubjectRe: Re: Current Valuation
    Entry02/04/2018 04:59 PM
    Memberdd12

    Int'l Coalitions 2017 EBITDA is trending this year to $66mm annually, and CapEx is roughly $20mm.  Nectar is most of this, how much we don't know - Air Miles ME is in there, for instance.  guess:  allocating coporate expense across the company divisions pro rata for gross billings, i'd say the say the entire division does $25-30mm of FCF.

    sidenote:  Americas Coalitions (Aeroplan + whatever Canadian loyalty businesses are included) is trending to EBITDA of $275mm, and CapEx of $20mm.  allocating corporate as stated above, i am getting to 2017 FCF of roughly $190mm for the Americas Coalitions.  the GLS division is costing us significantly, i think about $25mm when fully-loaded for corporate.

    if we want to get paid, we call AC and say, "in exchange for the cash that Aeroplan will generate in 2019/20 under our deal, paid to us upfront; plus a 1% royalty on all future billings (same thing Aimia recently sold / gave away to DIV for the Air Miles trademark), we will hand you the keys to Aeroplan Monday AM."  they say, "you're done," and everyone is happy.  stock goes to $5 immediately, on its way toward $7.

    would someone with more juice than i have please make them do this, i bet this VIC board would all join and cover a meaningful percentage of the vote.  the only way we lose from here is bad mgmt.  they are really bad, and they are the risk.


    SubjectCorrection
    Entry02/04/2018 05:17 PM
    Memberdd12

    Aeroplan cash flow for 2018/19


    SubjectRe: Re: Current Valuation
    Entry02/04/2018 06:33 PM
    Memberhkup881

    xds68;

    There is no announcement on AMEX yet.

    For Aeroplan boondoggle, I was merely referring to the fact that AC leaves in 2020. CEO did not say anything on the topic that I am aware of.

    In terms of AC turning predatory, the most logical outcome is selling Aeroplan to AC or selling it and keepsing some sort of residual.

    dd12 beat me to the numbers. I would also mention that in the international coalitions number is the Air Miles royalty which was almost pure cash flow until it was sold, making legacy Nectar even less cash generative


    SubjectRe: Re: Re: Current Valuation
    Entry02/04/2018 06:37 PM
    Memberxds68

    Yeah I just went back and looked at the air miles sale again - that was valued like a forced distressed sale with a short liquidation window - inexplicable.

    How do you get to 66 mil ebitda? I thought it was 24% of billings at a 8.5% ebitda margin in 3q, so in the third quarter was 114*.085=9.5 million - what am I missing?


    SubjectRe: Re: Re: Re: Current Valuation
    Entry02/04/2018 07:29 PM
    Memberxds68

    Ok, I see, 4q is the big qtr. it won’t be that big this year I don’t think, but bigger than 9 run rate.

    any thoughts on Amex?


    SubjectRe: Correction
    Entry02/05/2018 09:37 AM
    Memberlendario

    I think that your NAV valuation ignores the points liabilities. You can only reach even close to your value per share only if you are a) confident that management can massively devalue the points or b) you are 110% sure that there will be no unwind of the liabilities. This would mean people keep spending with Aeroplan cards, banks are happy to have Aimia as a marketing tool, new redemption options are good enough.

    I think that on point (b), no one can really be sure of this and it's really pure speculation one way or another. On point (a), we have been shown with certainty by this Nectar transaction that management is uncapable.

    So, what is left is basically a play on a minority stake in a Mexican loyalty program... good luck

     


    SubjectRe: Re: Correction
    Entry02/05/2018 10:11 AM
    Memberdd12

    lendario, herein lies the disagreement.  i do agree that mgmt. is incapable of any trust, though i do think the Nectar transaction was rational, despite the undesirable result.

    my view:  AC and now this chintz program with Sainsbury should be proof enought that independent loyalty programs, where the owner does not control the redemption product, are not long for the world.  AIM has equity in PLM, so there is alignment there.  but Aeroplan needs to accept what it is, not what it was:  its future upside is what Air Miles is now, and the downside is pouring resources into saving it.  horrible risk / reward.

    mgmt. demonstrated they understood, in their words, the best "risk-adjusted" outcome for Nectar.  the same thing needs to happen with Aeroplan, pronto.  lock-in the 2-year NPV of the program, take what you can get in the residual (not much), and print it.  any other path is unreasonable, IMO. 


    SubjectRe: Can Aimia survive is more partners leave?
    Entry02/05/2018 12:17 PM
    Memberhkup881

    Why do costs of rewards have to increase? If you are putting the program into some sort of run-off, you increase redemption margin and that in itself slows down redemption activity. You are assuming that they fight to retain cardmembers, these nuckleheads may just do that, but a logical human focused on maximizing NAV would let it all burn down as efficiently as possible--hence why adult supervision is needed here.

    I also think your opex number drops dramatically if they have fewer cardmembers and lower billing. There will be negative leverage here but it isn't as bad as you make it seem.

    Isn't all of this moot anyway?

    In a true run on the bank, where they cannot gate/devalue their way through it, they will simply BK the Aeroplan sub. $300m is trapped in there and goes to money heaven and you are left with $2/shr less in net assets after pension/pref/everything else. Based on my post #134, you have something worth $4.40/shr if all the restricted cash goes poof. Then you probably have severence costs and whatnot, but there's still something left here in terms of value as by 2020/2021, they've paid off all debt, have net cash of ~$300m outside of Aeroplan and have PLM and a few other subs that aren't all that interesting, but still there. As long as they're willing to use the nuclear option, instead of funding a run on the bank, you get something worth today's quote and that's even if you discount this all at a healthy rate.

     


    SubjectRe: Re: Re: Can Aimia survive is more partners leave?
    Entry02/05/2018 12:35 PM
    Memberhkup881

    LuckyDog- It simply doesn't work like that. If there's no accumulation, there's no reminder to point holders to redeem which strands points and increases functional breakage (10k points short of a flight or whatever) and most decide not to finish the earn/redemption cycle--especially as their points earning program has discontinued. Others will either redeem for a much higher margin toaster oven, or re-join the same loyalty program through a different card to finish their redemption cycle, which adds revenue and likely puts them back on the hampster wheel at a new card. Even if they join the new card only to earn 10k more points to complete an earn/redemption cycle and leave right afterwards, they will likely earn 11k or 13k or something as it's hard to keep track in real time (especially with bonus points and whatnot), leaving them 20k short of the next goal, and those points then strand, hence the redemption margin will ALWAYS increase as you decrease earn velocity.


    SubjectRe: Re: Re: Re: Re: Can Aimia survive is more partners leave?
    Entry02/05/2018 01:39 PM
    Memberhkup881

    I agree with your math when applied to a single card holder, but the stranded points are still at a higher gross margin b/c of the 1000 extra stranded points become breakage, which over time is part of overall gross margin. That was the point I was trying to make in response to your post #147.

    We don't have enough data to go on yet, to know if management will run this program as a sunsetting program going into slow-motion run-off or not. They may very well destroy all our equity by getting agressive on rewards to retain cardholders and reducing margins, but keeping everything else, that 1k of stranded points increases margin, not decreases margin.

    What your math doesn't show, is that some % of card-holders will not go through the mental damage of opening a new card account to salvage their stranded points and for many people, if they're at 5k and need 25k, they will likely simply strand those and move on with life. Add in those stranded points and your cash outflow becomes negligable or even a cash inflow.

    All this discussion of points in the past 150 comments is being done by a bunch of hedge funds using spread sheets to guess about what will happen. There are 2b points of liability with 5m cards. That's $400 per person. Most of these points are clustered amongst 10-20% of cards who have accumulated these points for whatever reason, without redeeming them. Remember, these are people who choose this program instead of a cash back program. These are people who are carrying debit balances at 19% APR and can always get $300 cash back for applying for a new card and using $1,000 on it in 90 days or whatever the most recent offering is. These are not people micro-managing their finances by any means. Some of these people are dead, some of these cards are at SMEs and corporates that no longer exist, or forgot they had the card. A lot of this will simply strand.

    Your redemption margin increases dramatically as people stop spending. Yes, this is a forever liability, but it's managable as the IBNR tail is so long on the redemptions that future cash flow will offset it. Think back to Blue Chip Stamps. There are still billions of face value of stamps outstanding. As accumulation slowed, redemption slowed, but at a slightly slower rate--meaning that the program had some leakage into sunset. However, the vast majority of the rewards basket eventually became the equity owner's--hence why Blue Chip Stamps owns Wesco.

     


    SubjectRe: Activist is here..
    Entry02/06/2018 07:16 PM
    Memberdd12

    reminds me of the chaotic Y2K Sportscenter spot, where Charley Steiner took charge:

    https://www.youtube.com/watch?v=99z_d-iRnsg&feature=youtu.be&t=26

     


    SubjectRe: Card IPO
    Entry02/08/2018 08:19 PM
    Memberstraw1023

    Your 3mm is only part of what they own.

     

    Look at page 144 of S-1 and details in note 3. They own 11.9mm shrs. I am trying to figure out if this also includes their convertible note holdings. On first read, I do not believe the 11.9mm shares includes these assets.

     


    SubjectRe: Re: Card IPO
    Entry02/08/2018 09:35 PM
    MemberRay Palmer

    You're right and good call; was just quickly flipping through post IPO pricing


    SubjectRe: Re: Re: Card IPO
    Entry02/08/2018 10:40 PM
    Memberstraw1023

    After reading in detail I believe the 11.9mm shares are everything.


    SubjectRe: Card IPO
    Entry02/08/2018 11:11 PM
    Memberdd12

    Ray Palmer, it was 12mm shares, now it's 3mm shares, they did a consolidation between filings.

    total shares oustanding, post-offering, is roughly 20mm


    SubjectRe: Re: Card IPO
    Entry02/09/2018 07:02 AM
    Memberstraw1023

    dd, right you are. They did 1:4 split at end of january.


    Subjectwhat's going on here?
    Entry02/15/2018 09:44 AM
    Memberdanconia17

    thoughts on the earnings report?  stock down quite a bit today <EOM>


    SubjectRe: what's going on here?
    Entry02/15/2018 10:15 AM
    MemberRay Palmer

    the q was soft, the outlook was poor, and the Nectar sale was a disaster


    SubjectRandom Thoughts and Questions
    Entry02/15/2018 12:52 PM
    Memberstraw1023

    1) Based on the answers to Chris Mittelman's Nectar sale question, I think we have the answers to our questions about Nectar. Mgmt made two points: (1) Nectar points are extremely "liquid" and can be spent almost instantly (mgmt made explicit the difference with Aeroplan); and (2) Sainsbury has credible threat to start its own loyalty program quickly because it has "all the pieces." Chris kept pushing the point that it was a game-of-chicken and that AIMIA was so concerned about avoiding the risk of the car crash that they gave all the gains of keeping Nectar alive to Sainsbury. I believe both Chris and management were correct. Mgmt took a pretty bad outcome to avoid the worst-case outcome. If mgmt had negotiated harder, could they have gotten another $50mm? probably.

     

    2) Obviously, the guidance is a disaster. Does anyone have a guess what the 2018 guidance implies for redemption rates? The shortfall versus the $240mm of cash flow hkup suggested in note 134 is partly due to drop in gross billings but seems more explained by higher redemption rates. It sure seems to me that this guidance shoots down a key part of bull thesis.

     

    3) It seems pretty obvious that now Air Canada will negotiate hard to buy the company with a (different) game-of-chicken argument as Sainsbury. They will tell mgmt that they will be out of a job and that equity will be zero-ed out if they do not sell to Air Canada. I do not think the argument is nearly as credible as Sainsbury's argument, but it does seem to be where this is headed. I think mgmt has a lot more levers to pull here to negotiate strongly against Air Canada, but to Chris's point, they have not shone themselves to be the strongest negotiators.

     

    4) As a standalone entity, this guidance calls into question the more optimistic valuations and puts $0 into play. It challenges a core assumption of the bull thesis regarding redemption rates. With all this being said, I'd still argue that most likely outcome here is Air Canada buying AIMIA for C$5/shr.


    SubjectRe: Re: Random Thoughts and Questions
    Entry02/15/2018 01:11 PM
    Memberstraw1023

    bdad,

     

    This is a great point, and I thought of saying it, but then I thought: "is it made up?"

    Q4 '17 is not made up and they have some visibility into Q1'18. Do they have other ways of projecting? not sure.

    But I think your point about redemptions (and also gross billings) is a strong counter-point.

    straw

     


    SubjectRe: Re: Re: Random Thoughts and Questions
    Entry02/15/2018 01:37 PM
    Memberabcd1234

    Most people on this thread are far more knowledgeable about this business than myself, but in my opinion, the massive mistake made by the bulls here was their lack of understanding of Nectar.  I've never owned this stock (I have owned the bonds and prefs though) so I can only speak for myself here but my major focus has always been on aeroplan.  Maybe the 2018 guidance was a little weak but people had to have thought accumulation will slow a little and redemption will pick up as we move toward 2020.  So I really don't think the guidance should have been a huge surprise but that is only in light of how much EBITDA and FCF was generated by Nectar.  Nectar did $60mm of EBITDA and $50mm of FCF in 2017.  As hkup viewed the SOTP, he basically assumed consistent cash flow until 2020 and then assumed no value for any coalitions after that.  As alluded to, I think keeping that roughly constant was pretty aggressive as we move towards 2020 but the bigger problem (for now) was the implied value ascribed to Nectar.  They paid $174mm to get rid of it and lose $100mm (2 years of $50mm) of what was assumed cash flow, or a $274mm delta, which is substantial relative to the market cap.


    SubjectRe: Random Thoughts and Questions
    Entry02/15/2018 01:47 PM
    Memberhkup881

    So, I've round tripped this and am pissed at myself and mostly at management for disasterously handling Nectar. This is the rare circumstance where setting an asset on fire would have a higher NPV than selling it... 

    In italics

    1) Based on the answers to Chris Mittelman's Nectar sale question, I think we have the answers to our questions about Nectar. Mgmt made two points: (1) Nectar points are extremely "liquid" and can be spent almost instantly (mgmt made explicit the difference with Aeroplan); and (2) Sainsbury has credible threat to start its own loyalty program quickly because it has "all the pieces." Chris kept pushing the point that it was a game-of-chicken and that AIMIA was so concerned about avoiding the risk of the car crash that they gave all the gains of keeping Nectar alive to Sainsbury. I believe both Chris and management were correct. Mgmt took a pretty bad outcome to avoid the worst-case outcome. If mgmt had negotiated harder, could they have gotten another $50mm? probably.

    The other option was to eek out $40-60m of cash flow until the contract ended, then put it all into run-off and let the chips fall where they may in a BK remote subsidiary. Your $40-60m of cash flow probably covers incremental severance and you put no more cash in. So you come out $174m ahead. Maybe you even come out further ahead than that, depending on redemption rates. If the program runs out of good redemption options once Sainsbury leaves, will people be able to redeem? What if you make it really obnoxious to redeem? What if the only redemption option is Virgin Rail? I could see you coming out $200m+ ahead here and getting to use that capital for the next few years until it's called back by redemptions. Remember, Blue Chip sorta melted away and the cash stayed in the program. Management is managing the business for simplicity and reputational risk, as opposed to maximum cash value b/c they aren't considering that a program can die peacefully. Think of the negotiating power you have when it comes to AC going forward. I bet a good portion of Aeroplan card holders think that AC owns Aeroplan. Imagine the reputational risk when you threaten AC to put it into run-off. I bet an even higher percentage of Nectar card holders think that Sainsbury owns it. They could have threatened to torpedo the program and gotten much more out of Sainsbury in terms of extortion. Canadians are sort of stuck using AC. Grocery in the UK is super competitive. Sainsbury cannot risk pissed off shoppers going somewhere else.

      

    2) Obviously, the guidance is a disaster. Does anyone have a guess what the 2018 guidance implies for redemption rates? The shortfall versus the $240mm of cash flow hkup suggested in note 134 is partly due to drop in gross billings but seems more explained by higher redemption rates. It sure seems to me that this guidance shoots down a key part of bull thesis. Nectar was 10m more than my estimate and cash taxes will kick in. I'm at a loss for the rest of the gap. Still trying to compute it.

     

    3) It seems pretty obvious that now Air Canada will negotiate hard to buy the company with a (different) game-of-chicken argument as Sainsbury. They will tell mgmt that they will be out of a job and that equity will be zero-ed out if they do not sell to Air Canada. I do not think the argument is nearly as credible as Sainsbury's argument, but it does seem to be where this is headed. I think mgmt has a lot more levers to pull here to negotiate strongly against Air Canada, but to Chris's point, they have not shone themselves to be the strongest negotiators. A stick of salami could do a better job negotiating.

     

    4) As a standalone entity, this guidance calls into question the more optimistic valuations and puts $0 into play. It challenges a core assumption of the bull thesis regarding redemption rates. With all this being said, I'd still argue that most likely outcome here is Air Canada buying AIMIA for C$5/shr. I worry that they'll sell good assets to ensure they can keep their jobs, rather than selling Aeroplan to AC and protecting PLM, which is the key asset here.


    SubjectRe: Re: Re: Re: Re: Mittleman
    Entry03/05/2018 06:09 PM
    Memberrtrdtx

    http://www.valuewalk.com/2018/02/mittleman-brothers-letter-aimia-inc/

     

    Says $480mm as of 12/31/17 in link


    SubjectRe: Aimia miles on amazon
    Entry03/19/2018 10:36 AM
    Memberhkup881

    Normal companies that do deals with Amazon, run by normal adults who care about informing shareholders, usually issue press releases in these sorts of circumstances. They also tend to get on the PR circuit to eductate cardholders so that they increase retention and usage...

    Just saying...


    SubjectI am with-holding votes for the legacy board at the AGM
    Entry04/09/2018 05:17 PM
    Memberhkup881

    Based on the company's by-laws, if any board member does not get at least 50% of the votes cast, he/she needs to resign from the board. I suspect that many people would agree with me that the current board has done an abyssmal job over the past years, and 2017's failures are yet more evidence of continuing incompetence.

    -Somehow letting Aeroplan's agreement with Air Canada expire without an acceptable renewal deal

    -Air Miles was sold at a mid-single digit multiple to a non-existent royalty company which appreciated by $100m immediately after the deal

    -Nectar was sold to Sainsbury for a negative value rather than simply being put into run-off

    -Their bank credit agreement negotiations were so egregious that they're now fully hand-cuffed

    -They couldn't even pay their dividends correctly--but didn't realize they had no cash or ability to pay, until the day it was due to be paid

    I can go on and on, but I think you get the point. These guys don't deserve to run a public company--I'm not sure if they should even run a hot dog stand. Recently, 3 new board members were added, 2 of which are nominees of Mittleman Brothers, the largest shareholder of Aimia. I tend to think that these new guys should have a chance to salvage the obvious value here, and will be more successful if there are less legacy board members. In particular CEO Doug Johnston and Chairman Bob Brown must go as they are the architects of this mess.

    I intend to with-hold my votes for all board members except the 3 most recent ones. I intend to send a message and believe that over 50% of the shares will agree with me, that the current board has failed in their duty.

    It is time that Aimia has a board led by adults.

    Signed,

    Pissed off shareholder who's armed with a pitch-fork


    SubjectRe: I am with-holding votes for the legacy board at the AGM
    Entry04/09/2018 05:29 PM
    Memberdd12

    I'm glad you said it as I will be doing the same


    SubjectRe: Re: I am with-holding votes for the legacy board at the AGM
    Entry04/13/2018 09:09 AM
    Memberhkup881

    Looks like I've started something of a revolution here. I'm like Che Guevara (except I shower). 

    I think that this AGM vote will come in pretty close, so your vote will matter. If you vote for the incumbent board, you deserve what you get (good and hard). If you know any other large shareholders, let them know that they have a choice in the outcome at this company.

     

    22NW Fund Issues Statement Against the Re-Election of Aimia Board of Directors

    PR Newswire
     
     

    Believes Immediate Board Reconstitution is Necessary to Address Poor Performance and Value Destruction

    Intends to Withhold Votes for All Legacy Board Members at the Upcoming Annual General Meeting

    Condemns the Current Board's Ineffective Oversight and the Resulting Decline in Shareholder Value

    SEATTLEApril 13, 2018 /PRNewswire/ -- 22NW Fund, LP ("22NW" or, "we"), an investment partnership with more than $200 million under management, issued a statement today regarding Aimia Inc.'s ("Aimia" or, the "Company") (AIM.TO) upcoming Annual General Meeting of Shareholders (the "AGM") to elect the Company's board of directors (the "Board"), scheduled to be held on April 27, 2018.  22NW owns approximately 4.3 million shares, or about 3%, of Aimia. 

    Aron English, the Manager of 22NW Fund stated, "We intend to withhold our votes for all of Aimia's legacy Board members.  We believe the abysmal performance of Aimia's stock as well as the repeated incompetence demonstrated by Aimia's legacy Board members speaks for itself and should be obvious to all shareholders.  Aimia holds a collection of world-class assets with a strong financial position, yet the current Board – which owns close to zero equity in the Company – has managed to wipe out over 80% of Aimia's equity value in less than a year.  Although we cannot advise other investors how to vote their shares, we note that the Company has adopted a Majority Voting Policy pursuant to which any director nominee receiving fewer than 50% of votes cast "for" his or her election at the AGM is required to immediately tender his or her resignation."

    22NW believes the legacy Board is single-handedly responsible for the Company's unnecessary and completely avoidable value destruction and must not be re-elected at the AGM to prevent further destruction in shareholder value.

    Mr. English continued, "Shareholders should know that if Aimia's legacy Board members receive less than 50% of votes cast at the annual meeting, Aimia's Majority Voting Policy requires such Board members to tender their resign immediately following such a decisive referendum from the Company's true owners, its shareholders.  If the Board attempts to confuse or avoid this fact, we will take further steps to protect the rights of Aimia shareholders."

    "Aimia's legacy Board members have destroyed a staggering amount of shareholder value during their tenure, from the botched Air Canada negotiation to the most recent Nectar deal in which the Company managed to sell an asset producing substantial free cash flow for a negative value.  Our team, with over five decades of collective investment experience, views this to undoubtedly be the single worst corporate transaction we have ever witnessed."

    "We believe shares of Aimia are significantly undervalued.  With a qualified and properly aligned Board in place, we believe Aimia stock has at least 200-400% potential upside from current levels. Aeroplan remains a robust, high quality, sustainable business and we estimate that this asset alone is worth $1 billion even without Air Canada, which is many times Aimia's current market capitalization. In addition, Aimia's financial position is strong, with $550 million of cash on hand and $250 million of forecasted cash flow over just the next 24 months.  Aimia also owns many valuable assets unrelated to Aeroplan, with PLM alone worth over $500 million." 

    The time has come for a properly aligned Board of honest and qualified fiduciaries to lead Aimia into a bright future for the benefit of all partners, plan members, shareholders and employees.   

    Shareholders: this is OUR company and we must preserve and enhance the value of our investment.  Aimia's legacy Board has failed miserably and must be reconstituted immediately.

     

    How We Intend to Vote Our Shares 

     

    LEGACY BOARD MEMBERS: VOTE WITHHOLD  

    NEW BOARD MEMBERS: VOTE FOR

    Robert Brown

    Brian Edwards

    Roman Doroniuk

    Philip Mittleman

    Thomas Gardner

    Jeremy Rabe

    Emma Griffin

     

    David Johnston

     

    Robert Kreidler

     

    William McExan

     

     

    About 22NW Fund, LP:

    Founded in 2015, 22NW Fund is a Seattle-based value fund with $200 million of assets under management.  The firm specializes in small and microcap investments and has a multi-year investment horizon.

    Media Contact: 

    Aron English 
    (206) 227-3078

     


    SubjectRe: Re: Re: Re: I am with-holding votes for the legacy board at the AGM
    Entry04/13/2018 02:59 PM
    Memberhkup881

    Welcome to the revolution Comrade...

    Does anyone here know how to get in touch with the PM at Burgundy Asset Managment? They are the only large block I know of that can stand in the way of shareholders voting the legacy board off Aimia island.


    SubjectRe: Re: Re: Re: Re: I am with-holding votes for the legacy board at the AGM
    Entry04/13/2018 04:34 PM
    Memberhkup881

    http://www.news1130.com/2018/04/13/aimia-investor-says-it-will-vote-against-re-election-of-board-nominees/

    MONTREAL – The operator of the Aeroplan loyalty rewards program still faces the prospect of a shareholder revolt after a U.S. investor vowed to vote against the existing board of director nominees at this month’s annual meeting.

    22NW Fund LP of Seattle blames Aimia Inc.’s poor performance and plummeting share price directly on the board’s actions including the “botched” Air Canada renegotiation and the sale of the British program Nector to retailer Sainsbury.

    The airline served notice last year that it does not plan to renew its 30-plus year partnership when the current contract ends in 2020.

    “My view is that these people should be fired immediately,” fund manager Aron English said in an interview Friday.

    The fund said it owns about 4.3 million shares or about three per cent of Montreal-based Aimia.

    22NW Fund said it will vote at the April 27 annual meeting against chairman Robert Brown and CEO David Johnston along with directors Roman Doroniuk, Thomas Gardner, Emma Griffin, Robert Kreidler and William McExan.

    It will support new director nominees Brian Edwards, Philip Mittleman and Jeremy Rabe.

    English said he’s heard from other shareholders who are equally outraged with the board, signalling there’s a “good chance” they’ll win the battle over directors.

    “This board has driven the share price down 80 per cent in less than a year so yeah I would say that people are pretty unhappy,” he said.

    Aimia’s share price has fallen to a low of $1.40 from its 2014 peak of $19.88. It was down 1.8 per cent at $1.66 in Friday afternoon trading on the Toronto Stock Exchange.

    English threatened to take undisclosed action if board members who receive less than half of votes cast refuse to honour the company policy to resign.

    After meeting with the company several times, he said he’s had enough.

    ADVERTISEMENT

    “They’ve given it their best shot, they failed and it’s time for somebody else who actually owns equity in the company and is aligned with shareholders to have a shot here.”

    Aimia didn’t immediately respond to a request for comment.

    The company averted a battle with its largest shareholder after reaching an agreement with Mittleman Brothers Investment Management, which owns nearly 15 per cent of Aimia.

    As part of the deal, Rabe and the chief executive for Mittleman Brothers LLC were nominated to the board and signed a standstill agreement.

    English called that a good first step, but not sufficient to satisfy his concerns.

    Mittleman has agreed that until July 1, 2019 it won’t take any actions against Aimia, including soliciting proxies, voting any shares, calling a special meeting, proposing the removal of board members, engaging in short selling or making disparaging comments about the company.

     


    SubjectRe: Re: Re: Re: Re: Re: I am with-holding votes for the legacy board at the AGM
    Entry04/14/2018 05:55 PM
    Memberpcm983

    It's not clear to me how Mittleman is voting.  I can read withholding votes for the current board as part of "taking action against Aimia", but then again it explicitly says they will not be voting any shares.  If they won't be voting FOR the board when they need >50% of the shares outstanding for votes, seems like a pretty large oversight on Aimia's part in this regard.  Then again we've seen they aren't the best negotiators...


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: I am with-holding votes for the legacy board at the AGM
    Entry04/14/2018 07:05 PM
    Memberpcm983

    In the Aimia press release, which is partly copied in your previous message, Mittleman will not be "voting any shares" which to me reads as they will not be voting on anything, including shareholder proposals, board nominees, etc. In the case of board members, such an abstention is equivalent to a 'no' vote as they need explicit 50%


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: I am with-holding votes for the legacy board at the AGM
    Entry04/14/2018 07:37 PM
    Memberhkup881

    Are you talking about the article the reporter wrote? His language disagrees with the standstill in Mittleman’s canadian version of a 13d


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Re: I am with-holding votes for the legacy board at the AGM
    Entry04/14/2018 07:42 PM
    Memberdd12

    from the letter filed by on Sedar, signed by both Aimia and Mittleman:

    "The Mittleman Parties agree, in respect of any annual or special meeting of shareholders during the Restricted Period: (i) to vote in favour of the election of all Aimia management director nominees; (ii) to vote in favour of any other matters related to the consideration, assessment or evaluation of individual directors or the Board as a whole... "

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: I am with-holding votes for the legacy board at the AGM
    Entry04/14/2018 08:28 PM
    Memberpcm983

    Thanks, that's the answer then.  Apologies for the confusion


    SubjectRe: Amex agreement extended through air canada
    Entry05/14/2018 10:51 PM
    Memberhkup881

    New CEO = Not Screwing Things Up

    Thanks to everyone who withheld votes from the legacy board. We actually came damn close to kicking a few of them out, which is pretty impressive in that there was no activist even leading a campaign. Sorta like a 3rd world color revolution that spontaneously happens.

    Even if we failed to kick the board out, we got rid of the CEO. Let's hope Rabe is better than Johnston. There's great assets here, just needs someone competent to lead AIM forward.


    SubjectCongrats hkup on another double
    Entry07/25/2018 10:25 AM
    MemberChalkbaggery

    Could have seen more upside to the bid, but don't think anyone will complain about ~100% return in exactly 1 year. 


    SubjectRe: Congrats hkup on another double
    Entry07/25/2018 12:16 PM
    Memberhkup881

    Thanks-but It ain’t over yet!! Fun is just starting. 

     

    Im flying today. I’ll post something more thorough tomorrow. This offer eliminates the downside risk of a run on the bank, proves that Aeroplan has a positive value (mkt has been valuing it at -$700m-1b)and gives Aimia a great hand to negotiate a much better price for shareholders. If a deal does happen, you end up with PLM, CDLX and some small other assets that should be sold. You can then eliminate most of the corp overhead, collect dividends and focus on returning cash to shareholders. 

     

    If I didnt own any, I’d be buying it stupid here. At $250m, fair value on AIM is $6-10 (cant do spreadsheet math at the airport) I suspect aeroplan prints at a MUCH higher price... hence AIM is worth double digits. As I’ve said since day 1, it will cost them north of $1b to build it in house and it will take them 10 years. There was zero chance they would ever build it. 

     

    More tomorrow


    SubjectRe: Re: Congrats hkup on another double
    Entry07/25/2018 12:52 PM
    Membercan869

    What does the sum of the parts look like assuming Aimia takes the current offer?


    SubjectRe: Re: Air Canada, banks make C$2.25 bln bid for Aeroplan loyalty program
    Entry07/25/2018 05:14 PM
    Membersidhardt1105

    hkup - further to abcd1234’s post below, how do you imagine the company dealing with the prefs?  They can’t pay dividends to the common so long as accrued and unpaid remains outstanding on the prefs and the prospectus limits any share repurchases.  


    Subjecttreatment of prefs from here?
    Entry07/25/2018 05:16 PM
    Memberpuppyeh

    congrats hkup on an amazing call!

    i had a question on the treatment of the prefs from here. clearly a lot depends on the event path, but lets say they sell Aeroplan and then unwind the rest of the assets over time - am i right in understanding that there are no make-wholes on the prefs from asset sales? in other words AIM has no compulsion to buy-back/repay the prefs with proceeds from an Aeroplan sale? and thus effectively the pref recovery is still dependent on what happens to the stub assets/liabilities?

    thanks


    SubjectRe: Re: Re: Re: R/R here
    Entry07/26/2018 08:11 PM
    Memberhkup881

    Skimmer-you beat me to the SOTP analysis. My only gripes are that;

    -I think that PLM is worth more. If they do US $100m this year in adjusted EBITDA x 10 multiple / .765 fx = CDN $1.307b x .489 = CDN $639m  I tend to think you're at least a dollar/shr too low here. I also think you can fairly confidently use a higher multiple as well. If PLM were listed on the Bolsa, I think it would trade inline with many other growth companies that are in the 15-25x EBITDA range. So, 10x is conservative. 

    -I struggle with how to really value Aeroplan, but I know AC will struggle to re-create it for $650m and it will take them many years to get there. There is real strategic value here beyond just the current multiple on EBITDA. $650m is $130/cardmember and well BENEATH their consortium's cost of acquisition per card-member that is likely in the $200-400 range when you include signing reward points, marketing, SG&A, credit bureau checks, etc. That doesn't mean that it may not be reduced in value in a stand-alone basis, but these guys are outright stealing it at $650m. I think that even in 2023 when there is less revenue/cardholders in a standalone scenario, you get to at least $100m of EBITDA and a 10x multiple on that. 

    -The other assets are likely worth $0-100m (hard to tell with data given)

    -I think you have incremental cash flow while this all sorts out

    -I don't know the tax consequences and that deferred revenue may actually make it impossible to sell

    -$43m pension deficit

    On the Prefs, I don't see any reason they cannot spin out PLM into a standalone, strand the prefs with some mid-east divisions and you wipe this liability. 


    SubjectRe: Re: Re: Re: Re: R/R here
    Entry07/26/2018 08:24 PM
    Memberhkup881

    Just tossing it out there, but at $250m, AC consortium is bidding $50/cardholder. These are the top spenders in Canada (ie. most profitable cardholder relationships in Canada). Companies gladly pay $200-400/cardholder (often more for HNW ones) to acquire these guys organically and often get minimal spend revenue off of them as they don't go front of wallet and then try to re-coup that up-front cost over many years through annual member fees. We don't have enough spend data to really figure out what they're worth, but I know that a decade ago, Aeroplan cardholders would have been worth a whole lot more than $500 each and likely $1-2k each as they're actively engaged. 

    I'm just saying there's a LOT of value here (I've been saying it for a year now and felt pretty lonely) and AC CANNOT re-create this value. They will 100% be forced to buy Aeroplan. It's just a question of how much it costs. Further, Aeroplan has the cards here b/c they can direct so much load factor away from AC that they can BK the airline if they felt like it. 

    AC played a game of chicken b/c Doug Johnston may have been one of the stupidest people to ever run a public company. You now have adults in charge and I think AC may be in a world of pain here if they cannot buy Aeroplan. 

     


    SubjectRe: Re: Re: Re: Re: Re: R/R here
    Entry07/26/2018 09:01 PM
    Memberhkup881

    I think the smart move here is spin PLM, sell CDLX other crap, sell remain-co to AC

    I am not a Canadian legal expert, but Brookfield figured out how to strand the Pref. What happens if they sell it to AC and AC never turns the pref back on and then uses transfer pricing to suck the equity out of Aeroplan? 

    I just think you have a bad hand and not enough upside here on the pref vs the common


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: R/R here
    Entry07/26/2018 10:27 PM
    Membersidhardt1105

     

    There is a lot of back and forth about whether AIM can screw the prefs so we want to provide more definitive info on this point.  Specifically, in AIM’s financials they state that the reason they are not paying dividends is due to their determination that the capital impairment test set forth in paragraph 42(b) of the Canada Business Corporations Act (“CBCA”) would not be satisfied.   This paragraph states the following, “A corporation shall not declare or pay a dividend if there are reasonable grounds for believing that the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes.”  The “stated capital of all classes” in this paragraph includes the preferred.  The company must also pass this test twice – once when the dividend is declared and also when the dividend is paid.  After speaking with a number of Canadian lawyers, we have learned that the directors and officers who approve and pay any dividend that would be in breach of this paragraph would suffer PERSONAL liability in the amount of the dividend paid.  So while we agree that leaving the preferred stranded would launch a flood of lawsuits, the personal liability is icing on the cake - and for that reason we are confident it will never get to the point of litigation. 


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: R/R here
    Entry07/26/2018 11:53 PM
    Memberstraw1023

    Does D&O insurance cover this?

     

    Or are you saying by law, insurance is not allowed to cover this liability? I am not aware of any laws that restrict insurance from covering any civil law penalties.

     

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Re: R/R here
    Entry07/27/2018 11:46 AM
    Membersidhardt1105

    I am happy to be proved wrong since I am not an expert in Canadian law but my understanding is that directors are held to a higher standard which has ramifications for both personal liability and D&O.  I encourage you to do some googling on CBCA Section 241 – the punchline is the Canadian courts have in fact ruled that directors and officers are personally liable for their misconduct – so precedent has been made under CBCA rulings.  As for whether these personal liabilities would be covered under D&O insurance, the basic answer is “maybe…maybe not.”  D&O is not a catch all – it can be tailored in many different ways.  And stating the obvious, any insurance company will try to dismiss this claim – so if you are management of AIM, where is your incentive to screw with the prefs?  The trade off is a non-starter.  I believe the CBCA rules are a good explanation for why the dividend that was already declared last year was pulled before payment – the board and management simply did not want to take any risk around this point.


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: R/R here
    Entry08/02/2018 11:41 AM
    Memberhkup881

    Isn't the other issue with the pref that it's cheap perpetual debt that's non-cash and they never turn it on and just let the cash accumulate inside Aimia and do something else with the cash that has a higher return that the rate of accrual? So the pref can accrue, but it isn't attractive to anyone as an owner and trades at a huge discount forever...


    SubjectRe: Aeroplan synergies?
    Entry08/02/2018 11:49 AM
    Memberhkup881

    It's not really synergies. it's all about replacement cost. AC simply cannot build this for anywhere near the market cap of AIM and it will take them years to try


    SubjectRe: Update on discussions with current partners regarding conditional acquisition of Aeroplan busine
    Entry08/02/2018 09:29 PM
    MemberChalkbaggery

    Curious if the stock actually goes up tomorrow to reflect higher bid or craters on deal break


    SubjectRe: Re: Update on discussions with current partners regarding conditional acquisition of Aeroplan bu
    Entry08/02/2018 09:33 PM
    MemberRay Palmer

    I believe earnigns are tomorrow morning, so the earnings + what they say on the call will probably be meaningful


    SubjectMittleman
    Entry08/06/2018 01:11 PM
    MemberRay Palmer

    Mittleman's letter to the BoD contains a lot of datapoints from the past that I think are really useful for framing the upside and Aimia's leverage here.

    Seperately I posted a write up from last year here; I think members of the board know a lot of this already but it contains a lot of interesting tidbits on the valuation and discussion from the time of the TD / CIBC deal that I also think help w/ understanding Aimia's leverage.


    SubjectRe: Mittleman
    Entry08/07/2018 12:36 AM
    Memberstraw1023

    Mr Palmer,

    Thanks for all your work on this. And I agree with Mittleman's analysis, but hasn't AIMIA already countered with C$450mm? 

    This is where I am confused.

    I would think the BoD had approved the C$450mm counter-offfer. Do you agree? It is possible the Mittleman Directors dissented. Is that what this indicates? That the BoD is split on whether the C450mm counter-offer is adequate. I think it is odd to make this counter-offer and then announce it publicly if BoD not unanimous. But I find it less likely that Mittleman Directors approved it.

    This seems awfully ham-handed and makes a suitable sale price more difficult. I understand that the BoD and Mittleman could not directly co-ordinate, but surely the two Mittleman directors (and all the Directors) understood that C$450mm was grossly inadequate according to Chris Mittleman. I was very surprised to read the $450mm counter-offer last week and am now more confused than ever.

    If I were Air Canada, I'd also be confused. With whom am I negotiating? If I agree to $450mm, does the goalpost then get moved? Air Canada does not want to negotiate against itself in a phantom negotiation.

    One add'l question: Would the sale of Aeroplan require shareholder approval or could the BoD move forward without shareholder approval?

    Thanks


    SubjectRe: Re: Mittleman
    Entry08/07/2018 01:04 AM
    Memberhkup881

    Look, this is the most incompetent board to ever exist at a large pub-co. They've overseen the destruction of $3b of value while producing ~$200m of cash flow per year for over a decade. It's actually quite stunning. If Mittleman hadn't put 3 adults in there, they'd likely have figured out how to lose the rest of the ~$200m of equity value that remained at the time of the board change. There will be HBS case studies dedicated to how incompetent Chairman Rob Brown is as he sat there and oversaw this entire capital destruction exercise. 

    Remember, these same jokers sold Nektar for NEGATIVE $174 million despite it having ~$50m a year of cash flow. They sold the Air Miles trademark at 5-7x cash flow. They literally have a 3rd grade competence in valuing an asset.

    Now, they cannot even figure out how to hire an I-Banker and have a proper auction for their crown jewel. I've never seen someone publicly counter-offer a price that's both arbitrary and insane. On the Q2 CC, Jeremy Rabe could not justify that number or the logic behind it. It's just a made up number and was likely made public b/c of an internal fight at the board level. 

    Seriously, how can they sell something like this without an I-Banker leading the process, soliciting bids and trying to find a few potential buyers. Air Canada has no choice, they HAVE to buy this thing. All other buyers are financial or strategic. They likely will see a price inline with the low end of Mittleman's stated range of values. Air Canda can justify the higher range. You cannot just sell it at 2-3x EBITDA without at least seeing who else wants it.  

    It's like watching a bunch of monkeys argue on how to divide a watermellon or something. The remaining 5 legacy board members should be forcibly retired. Clearly, removing 3 of these idiots was not enough. 

    The last few days have shown criminal incompetence at the board level and I'm glad to see Chris Mittleman standing up for all shareholders here.

    Given the massive shareholder dissention here, I  suspect that Aimia BoD's legal council (assuming they bothered to hire any adults at all) will VERY strongly advise on a shareholder vote to avoid future lawsuits. I do not think the board will get enough votes to get a deal done at $450m. 


    SubjectRe: Re: Re: Mittleman
    Entry08/07/2018 11:21 AM
    Memberhkup881

    A friend corrected me that under Canadian law, the sale of Aeroplan would have to be voted on and would need a 2/3 majority to pass. I think it's now safe to say that even at a $450 million number, there aren't sufficient votes for it to pass. So ball's in Air Canada's court here.

    I wouldn't be surprised if their next act will be a tender for the whole company. 

    For the life of me, I cannot figure out why the shares aren't trading at a much higher price. Even assuming a $325 million transaction, you're looking at ~$7/shr in value here. 


    SubjectRe: Re: ... and is supported by Mittleman Brothers.
    Entry08/21/2018 10:51 AM
    Memberahnuld

    maybe im missing something, but here's my math

     

    450+CA-Total Liabilities but then add back the unearned revenue (points AC is assuming). Leaves about 230mm. Then subtract the pref face value of 325. gets negative equity value of 95mm + value of investments in mexico/other.

     

    so not seeing the homerun math, but I probably missed something 


    SubjectRe: Re: Re: Re: ... and is supported by Mittleman Brothers.
    Entry08/21/2018 02:15 PM
    Memberahnuld

    so hes ignoring the negative working cap, the pension liability ect.

    I havent seen any statements that those all go with to AC.


    SubjectQuick Update
    Entry08/22/2018 01:15 AM
    Memberhkup881

    Figured I'd throw out a quick update here. 

    Aeroplan will be fire-sold (assuming shareholders don't have a revolution) for $450m. This is a very far cry from a year ago when almost everyone thought it had a negative value and possibly even a $2b negative value. Let's just say it was lonely being a contrarian. (sorry for the victory lap--but read some of the notes in the first 100 comments and you'll see how lonely it was) 

    Following the sale, you get over $1b in cash, ~$600m tax shield (by my math, please correct me if wrong), cash flow generation until closing of ~$25-75m, CDLX, a hodgepodge of crappy assets and PLM. I'm going to take a minority opinion that PLM is worth well more than 10x as it's in the growth phase (4% penetration in Mexico) of an airline loyalty program with a long-term airline contract. As the program grows, it will have huge negative working capital build. It is growing ~20-25% a year and I suspect if it was spun out and traded on the Mexican Bola, it would trade at 15-25x EBITDA. 

    As 10x PLM EBITDA, you get a value in the mid/high $7 range for AIM as most of the adjustments are for cash items or CDLX which you can use today's quote. This excludes the current tax shield from fireselling Aeroplan and leaves some uncertainty on final working capital adjustments/pension value (think it goes with Aeroplan)/cash build until sale/etc.

    If you think PLM is worth 20x EBITDA, you're somewhere in the $11's. Somewhere in that range is where we end up, depending on how PLM is treated (probably should be spun off). Then you have a clean cash shell and I suppose Mittleman Brothers won't do anything too stupid with it (probably do something smart) with a tax shield. 

    I know this saga has gone on for 15 months (since the AIM board decided that self-immolation was a suitable corporate strategy) and just under 12 mos since I first wrote this up. However, I feel like we're in the 5th inning here. Now that Aeroplan uncertainty is resolved, the question is what will PLM be worth and how will the cash pile be used. Stay tuned...


    SubjectRe: Quick Update
    Entry08/30/2018 03:59 PM
    Membermpk391

    So, I agree the shares could be interesting here.  When do you think a sale of Aeroplan would close, and what's the cash flow look like after that? 

    BTW, when I posted my model oh so long ago, that was my attempt at pointing out that the discounts that Aeroplan was getting on AC flights is probably close to 50% - in line with Bay Street estimates and (to be honest) much larger than I had originally estimated in my writeup of the preferred shares.  This discount has likely been a huge factor in Aeroplan's profitability, and the fact that it would be going away in June 2020 means AC has had a pretty strong negotiating position.  So I disagree with Mittleman and others who say mgmt is just rolling over and selling at pennies on the dollar.  He and others have repeatedly ignored the disappearing discounts when it comes to valuation.

     

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