Aimia (AIM.TO) – Asset Sale – 100%+ Upside

Current Price – C$3.46

Potential Value – C$9.99

Upside – 100%+

Expiration Date – TBD

Mittleman Brothers Q2 2018 Letter

 

Update May 2020: Investment thesis has change significantly from the initial write up below. Please see comment on the 14th of May 2020.

Aimia is an operator/owner of loyalty programs with the largest asset being Canada's Aeroplan with 5m members. The business used to be a cash cow, but over the last year company's stock has been on a roller coaster ride.

Initially there were rumor's that Air Canada (the main Aeroplan partner) would not renew it's contract, then these rumors got confirmed in May 2017 with Canada Air saying it will develop it's own loyalty program. This prompted Aimia to suspend dividends in order to conserve cash in the face of uncertainty. In Feb 2018 company's management sold Nectar business back to Sainsbury's at what some considered to be a remarkably low price. This move tarnished management's reputation and investors lost trust in management's abilities to negotiate favorable asset sale transactions and turnaround/liquidate the company maximizing shareholder value. Due to activist pressure CEO was let go and two new directors were installed by Mittleman. CEO was replaced by Jeremy Rabe, founder and director of PLM Premier (Aimia owns 49% of this JV).

All of this brings us to today. Right after announcing new strategy to turnaround the company, Aimia received unsolicited offers for two of its main assets - C$250 for Aeroplan and $180m for PLM Premier. The first one is being considered and has deadline of the 2nd of August and the one for PLM Premier was promptly rejected.

Some shareholders regard these offers as ridiculously low and other are encouraging Aimia to start negotiations and push for slightly improved offer to sell Aeroplan.

Mittleman Brothers outlined SOTP valuation reaching C$10/share vs current C$3.46/share (see below). This might be overly optimistic as it requires Aeroplan price to be raised 4x and PLM Premir 2.5x. However, the consensus seems to be that these are just the starting offers and that prices will be negotiated.

The ball is now in Aimia's court and likely some kind of response will come through today/tomorrow which might even push the share price upwards in the short term.

All will depend on who - Aimia or Air Canada consortium - has more negotiating leverage in this case and who can walk away from the deal by loosing less. Currently that is a bit uncertain. Air Canada will need loyalty program and starting one from scratch and attracting 5m members might be more costly than the C$1bn acquisition price for Aeroplan. At the same time Aeroplan's future without Air Canada in it is still quite questionable and will require Aimia to sign up many new partners in order to retain its membership. New CEO who has successfully grown PLM Premier in Mexico seems to be fit to achieve this.

 

AIM valuation

Note: amounts differ slightly from Mittleman due to USD/CAD as well as CDLX changes.

For further background on the company and current situation I suggest reading through Mittleman's letters (here and here) as well as these VIC write-ups (here and here).

 

Risks

  • At current offer prices Aimia is worth C$2.43/share which is a 30% downside. Before the offers were announced Aimia traded at similar levels of C$2.5/share. However, I do not think shares will revert to these levels as this seems to be the absolute bottom valuation of the assets.
  • Current market price already assumes there will be at least 30%-35% increase in offers for Aeroplan and PLM Premier. Thus the offers need to be bumped by higher than this for new investors to realize any upside.
  • It is not given that Aimia will be liquidated after the sale of one or both of its main assets. So shares might trade at a discount to cash value in a liquidation scenario. However, having Mittleman on the board increases the odds of focus on shareholder value maximization.

103 COMMENTS

  1. Iljaas Abdoella

    Hi dt,

    “…represents a total purchase price of $2.25 billion, including $250 million in cash and the assumption of approximately $2 billion of Aeroplan points liability”

    There is much more of unearned revenue on the b/s, which assumed to be taken over it seems in the above LHS SOTP. Where does the balance of ~ CAD1bn go?

    1. dt

      From the annual report:

      “The deferred revenue presented in the balance sheet represents accumulated unredeemed Loyalty Units valued at their weighted average selling price and unrecognized Breakage. The estimated consolidated Future Redemption Cost liability of those Loyalty Units, calculated at the current Average Cost of Rewards per Loyalty Unit redeemed, is approximately $2,014.8 million. “

  2. davea500

    Aimia Inc. is in talks with the Oneworld airline alliance as the Aeroplan frequent-flyer program operator bolsters its attempt to go it alone in the face of an unsolicited bid from Air Canada.

    Aimia is in discussions with the alliance, whose members include American Airlines, British Airways and Cathay Pacific, about making it a “potential preferred airline partner for the Aeroplan program,” spokeswoman Tammy Smitham said in an email. The talks were first reported by the Globe and Mail.
    https://www.bloomberg.com/news/articles/2018-08-02/aimia-in-talks-with-oneworld-as-air-canada-deadline-looms

  3. dt

    I was expecting Aimia to counter with a higher offer. Assuming the deal is struck half way (Aeroplan for C$400) and that similarly increased offer will come for PLM, Aimia shares would stand at C$4.3.

    So any previously expected large upside seems to be capped from here (at least in short term). In any case, nice to see things progressing in the right direction.

    I did not have a chance to listed to the call yet and should have further thoughts later.

    1. dt

      It’s getting more interesting and more puzzling by the day. Not even sure how to read this letter.

      This Mittleman letter comes after Aimia publicly announced their counter offer but does not even mention that Aimia has issued the counter offer. Also Mittleman has installed two new independent directors + CEO, Mr Mittleman himself sits on Aimia’s board. So on whose orders was the counter offer issued if Mittleman is arguing for a far higher price tag?

      What is really happening here? Seems like complete mess with Aimia’s governance.

      1. davea500

        Here was the AIM CEO speaking to valuation in the earnings call last week:

        Kenric Saen Tyghe, Raymond James Ltd., Research Division – SVP [4]
        Great. And then if I could just switch to some of the announcements overnight as well, Jeremy, the — it sounds as if the initial $250 million was a soft $250 million given the reference to all the restrictions, et cetera, in it, but perhaps that the updated offer of $325 million was a cleaner offer. Could you sort of, to the extent you can, speak to the updated offer and all the thinking around that $450 million number as referenced in your press release last night.?

        Jeremy Rabe, Aimia Inc. – President, CEO & Director
        “Sure. That’s correct, Kenric, that the $250 million initial number was highly conditional. I’d say there is less conditionality around the $325 million, but it’s still far below what we think the fair value of Aeroplan is. We went through and did a variety of valuation techniques — used a variety of valuation techniques to try to understand what should the business be worth, using comps, ECS, all that kind of stuff, looking at our business plan. There is just no way that you can get to a number like $325 million, whether it’s conditional or not. We think that $450 million was a very fair offer. We have a number of shareholders that are, frankly, pretty upset that we offered a number that low. But after going through a very thorough analysis with financial advisers in conjunction with our Board of Directors and the special committee, we think that, that was a very reasonable number, perhaps too reasonable. But what we wanted to show by issuing the press release last night, we were engaged in a very constructive — trying to be constructive in this process. And so we think that, that’s the right value for the business given what we know about the business today and, of course, that may change as our business plan continues to unfold.”

    1. Rick Sanchez

      does anybody know which brokers are best to buy Canadian preferred (I am U.S. citizen)?

  4. dt

    Some thoughts on Aimia and loyalty program business model from Laughing Water Capital Q3 letter:

    http://laughingwatercapital.com/wp-content/uploads/2014/01/Laughing-Water-Capital-Q3-2018.pdf

    Following the close of the transaction, Aimia will be a pile of cash, a large NOL, and assorted loyalty assets. It is impossible to pinpoint NAV as the assets are largely privately held, we don’t have full visibility into recent cash flows or the company’s plans for their preferred shares, and the present value of the NOL is indeterminate, but this is a case where I am happy to be approximately right rather than exactly wrong. I think a range of somewhere between $6 and $10 per share is a reasonable guess, suggesting that if following the sale of Aeroplan the remain-co was simply shut down and sold for scrap, we would earn an acceptable return. This is always a good place to start, but assuming that Mittleman Brothers remains in the driver’s seat, it is likely that NAV per share will grow over time, and that the gap between market prices and NAV will shrink, which provides the potential for considerable future appreciation.

  5. dt

    Mittleman Brothers appear to be against further asset sales at Aimia. From their Q3 investor letter:

    We believe that Aimia has many of the characteristics that made those prior investment vehicles such successful investments for us, except this time, with Mittleman Brothers controlling nearly an 18% stake in Aimia and with two of our nominated representatives on the Board, we should have substantial influence on the mission-critical capital allocation decisions that the company will face immediately after Aeroplan is sold. We have developed and shared with Aimia’s board a strategic plan for Aimia going forward that, if the Board approves, we believe would substantially enhance NAV per share and extract maximal value from the tax loss assets and other key remaining components of value. If the Board rejects our plan and decides to liquidate the remaining assets instead (which we think would be a mistake, and wrongly strand the tax loss assets), there is still nearly 100% upside from current price to our estimate of NAV, as long as fair values are attained for the remaining assets. That would be a much less than ideal outcome, but the Board will have to consider all options, and some shareholders may prefer realizing a more certain but likely smaller amount more quickly retrievable in a wind-down and liquidation. We hope that our longer term vision for reinvesting and growing the substantial remaining assets of Aimia will prevail. Regardless, we believe that our involvement as activist investors with Aimia has already saved the company hundreds of millions in cash value that would have otherwise been lost had we not interceded when we did earlier this year. So even if we’re not afforded the opportunity to do more with those assets that we helped salvage, we’re proud of the accomplishment our efforts have produced thus far.

    https://www.valuewalk.com/2018/10/mittleman-3q18-emerging-markets-exposure/

  6. dt

    Together with Q3 results, Aimia’s management announced start of strategic review process on the direction Aimia should take after the Aeroplan sale is finalized.

    The Board of Directors has formally commenced a process to review and evaluate the future strategic direction of Aimia assuming and following completion of the proposed Aeroplan transaction. As part of that process, the Board of Directors has asked Management to present it with alternative visions and plans regarding the Corporation’s mid- and long-term strategic future and direction, including as a leading player in loyalty management. The Board of Directors has, in its review process, decided to form a committee to be comprised of independent directors for the purpose of receiving and considering any such Management recommendation(s). The Board of Directors is currently actively engaged in these matters, and the Corporation will publicly disclose the results of its review process setting out the vision and direction of the Corporation once it has formally made decisions or determinations with respect to the foregoing.

  7. dt

    Together with the announcement of definitive agreement on Aeroplan sale, press release also mentions formation of special committee to evaluate strategic directions (not sure if this was mentioned anywhere earlier). However, the announcement is worded in a strange way as if special committee considers only proposals by management rather than truly evaluating future strategic direction:

    “As previously announced, Aimia’s Board of Directors is actively engaged in reviewing and evaluating the company’s future strategic direction, including as a leading player in loyalty management and it has formed a committee of independent directors for the purpose of receiving and considering Management recommendations.

    https://finance.yahoo.com/news/aimia-air-canada-enter-definitive-130000923.html

  8. dt

    Aimia plans to launch tender offer for up to 25% of the company. Further details on pricing will be announced by mid-April. I would expect tender to happen at premium to current prices mainly due to large (38%) discount to NAV as well as substantial tender size. Largest shareholders are unlikely to participate in the tender if the final tender price is materially below NAV.

    This tender is the outcome of the finished strategic review following Aeroplan sale. Instead of proceeding with the asset disposal and liquidation management intends to focus on existing loyalty operations as well as invest in sector consolidation. This is clearly not the outcome investors were hoping for (due to bad capital allocation track record so far), so this tender is like a candy to sweeten the situation. I am guessing that Mittleman appointed directors demanded it.

    Following Aeroplan sale and repayment of debt/dividends Aimia’s NAV stands at c. C$6.2/share comprised of cash (C$3.59/share), PLM stake (C$4.3/share), Cardlytics stake (C$0.43/share) less value of preferreds and pension deficit (-C$2.14). Additionally, the company has accumulated substantial NOLs. Aimia’s remaining operations are cash burning (c.C$80m cash operating loss during 2018), but likely to improve going forward as PLM continues to grow and corporate expenses related to asset disposals and strategic review are eliminated. In any case, downside seems to be very well protected here at least in the short term.

    Right after the results of the strategic review were announced Laughing Water Capital issued open letter asking non-Mittleman directors to step down from Aimia’s board ahead of the annual meeting. The gist of their argument is that those directors will in any case be forced to leave when Mittleman’s stand still expires on the 1st of July 2019. Therefore, I am expecting that both MIttleman and Laughing Water Capital will not tender if price is significantly below C$5-C$6/share. In H2 2019 Mittleman should be able to change Aimia’s management as well as strategic direction of the company towards asset sale and orderly liquidation eventually realizing value close to the current NAV.

    Obviously, I might be wrong in guessing Mittleman’s intentions – last year they have agreed to sell Aeroplan at c. half of their own very vocally communicated valuation.

    In any case I am at the very least expecting share price pop upon tender pricing announcement and then the decision whether to participate in the tender or not will depend on discount to NAV.

    1. Writser

      Not sure if it is relevant for US holders, but watch out for possible withholding taxes with tender offers in Canada.

    1. dt

      My guess would be no, as it is not an official company listing. But I really do not know how exactly OTC listings of Canadian companies work with regards to corporate actions.

    2. value_investor

      I called my brokerage with this specific question .. and their answer is YES … except if for whatever reason, american citizens are exempt from the tender offer.

  9. work 22

    Some questions if you don’t mind:
    1. Do you think the Board will step down before the AGM in July? If not, will Mittleman and Laughing Water prompt another vote and toss them out?
    2. Will these hedge funds want to liquidate the company and return all the capital? It seems like the bad scenario is AIM’s current mgmt squandering the cash balance with acquisitions and projects in business lines they’ve failed at before. Good scenario is liquidation— in my mind this stock screams to be liquidated and its NOLS tax losses sold to a private company that can use them.

  10. dt

    I can only speculate on these:

    1. Somehow I do not think the board will step down voluntarily, but I expect that activists should be willing and should able to push them out after stand still expires.

    2. My understanding is that the largest upside for these funds would be in full asset disposal. I do not think that NOLs can be transferred the way you describe, but a reverse merger situation.

  11. dt

    Another thing worth mentioning is that Mittleman has been somewhat reducing their stake in Aimia over the last few months (including the last week). Their total position has declined slightly from 28.8m shares to 27.6 – a reduction of 4% (full details on sedi.ca).

    That might be a simple case of cash/portfolio management, but definitely is a concern for my assumption that Mittleman would not be participating in the tender offer at current share prices.

    There is a risk that Aimia tender offer might turn out into replay of HCG.TO, where noone expected Buffett to tender, but he still did it and pushed tender pricing to the lower limit. See here https://specialsituationinvestments.com/2018/11/home-capital-group-hcg-to-tender-offer-6-upside/

  12. dt

    Tender offer announced:

    C$150m at C$3.8-C$4.5, expiration May 21st

    Mittleman will not participate:

    “Mittleman Brothers has notified Aimia that it does not intend to participate in the Offer. Based on publicly available information, as of April 5, 2019, Mittleman Investment Management, LLC, beneficially owned, directly or indirectly, or exercised control or direction over, 27.5 million Shares, representing approximately 18.1% of the issued and outstanding Shares.”

    With Mittleman staying on the sidelines upper limit pricing is quite likely.

  13. value_investor

    @DT

    Thanks a bunch for this update.

    The US dollar range is 2.85 to 3.38 .

    Just wanted to mention that because of the GAPFF symbol under which AIMIA sells in US exchanges. This could be useful for conversion.

  14. dt

    Laughing Water Capital comments on Aimia in Q1 2019 letter:

    Aimia, Inc (AIM.TO) – Aimia, referenced above, is now a top 5 position, and was the recipient of our public letters to the board. While I think it would be foolish to claim credit, subsequent to our first letter the incumbent chairman and one other board member stepped down from the company, which is a step in the right direction. The company also announced that they will be pursuing what I consider to be a venture capital strategy and making acquisitions in the loyalty space. While I think this strategy would be a poor use of shareholder capital, in my view it seems likely that the current board will be replaced at this year’s annual general meeting, or shortly thereafter via a proxy contest in July.

    Aimia is a small cap Canadian stock that is difficult to understand due to a hodge podge of assets and recent major changes in the business. It should therefore be no surprise that it trailed the indexes considerably in the first quarter. However, with cash greater than the market cap, no debt, and preferred securities whose dividends are covered by regular distributions from a ~50% ownership stake in Club Premier (Aeromexico’s loyalty program), investors are getting Aimia’s existing ILS business, a ~$64M stake in Cardlytics (CDLX), a 20% stake in BIG Loyalty (AirAsia’s loyalty program), a few other odds and ends, ~$800M in tax assets, significant upside from Club Premier in the form of special dividends and growth that is all but guaranteed by demographics, as well as the potential for world class capital allocators to deploy the cash in the future, all for free. In sum, while Aimia trailed the indexes this quarter, it appears that the stock has essentially zero downside, with the potential for substantial upside. Some of this upside will be crystalized in the near term, as the company has announced a tender offer for ~25% of shares outstanding at current prices. Taking a longer view, I remain confident that owning stocks with this sort of skew is a sure path to investment success over time, even if they don’t perform well every quarter.

  15. value_investor

    @DT .. Can’t thank you enough for posting the letter Laughing water capital.

    It is filled with nothing but “upside” scenarios !!

  16. work 22

    1, There may be tax issues for Mittleman in selling the auction, and for US investors in general as was mentioned above. You might get taxed as if the whole 4.50 CAD is a dividend, not sure though. But be careful! (I personally will probably hold and not tender)
    2. Investors who really believe in the story here would arguably not want to sell their stock in the auction as well, so Mittleman not selling is a great sign. I wonder if we see a meltup into the final terms and then seller’s remorse if the stock stays above the auction price. I’m not saying its going to happen just a distinct possibility.
    3. And I think Mittleman reducing their stake by 4% is probably just noise. I use to work for a portfolio manager running various accounts and you never know if a client sub account liquidated or something like that. 4% is not enough to be concerned.

  17. Brian Sturgeon

    I own GAPFF and am not seeing an option to tender shares on IB. Is the tender offer only happening on the TSE? Thanks

    1. nostradamus

      No option on the Canadian shares either. IB haven’t uploaded to their CA tool yet..

  18. Vinn

    I did participate in the last ECN capital tender offer in January of this year and did not get taxed (I am not a Canadian or US-resident). However, in this case it may be different, because the paid up capital by AIMIA for the shares is lower then the price of the tender.

    From the circular:

    “A Non-Canadian Resident Shareholder who sells Shares to Aimia pursuant to the Offer will be deemed to
    receive a dividend equal to the excess of the amount paid by Aimia for the Shares over their paid-up
    capital for Canadian income tax purposes. Aimia estimates that the paid-up capital per Share on the date
    hereof is approximately $0.01 (and following the Expiration Date, Aimia will advise Shareholders of any
    material change to this estimate). As a result, Aimia expects that Non-Canadian Resident Shareholders
    who sell Shares pursuant to the Offer will be deemed to receive a dividend for purposes of the Tax Act.”

    Compare this with the circular from the last ECN tender offer:

    “A Non-Resident Shareholder who sells a Share to ECN Capital pursuant to the Offer will not be deemed to have
    received a taxable dividend as a result of the sale provided that the paid-up capital of such Share for purposes of the
    Tax Act at the time of sale exceeds the amount paid by ECN Capital pursuant to the Offer. Counsel has been advised
    by ECN Capital that the paid-up capital of each Share for purposes of the Tax Act currently exceeds the maximum
    amount payable for such Share pursuant to the Offer. ECN Capital has also advised counsel that it expects that the
    paid-up capital of each Share for purposes of the Tax Act will exceed the maximum amount payable for such Share
    at the time the Shares are sold pursuant to the Offer. Accordingly, this summary assumes that no dividend will be
    deemed to be received by a Non-Resident Shareholder on a sale of a Share to ECN Capital pursuant to the Offer.”

    Don’t take this as advice though, because I’m not at all familliar with tax rules, just want to share my thoughts.
    Also note that for US holders the story is different yet again, because they seem to have a separate paragraph of text in the circular, which also mentions exemptions on the dividend treatment. I didn’t look further into this.

  19. value_investor

    @Brian, @Nostradamus and @Vinn

    Appreciate all your inputs. They help,
    I haven’t seen my brokerage received the terms of the tender yet .. just such a a slow process …
    Regarding tax, it is critical that we browse the relevant sections ( as mentioned by Vinn ) and tender … I also heard that, sometimes with canadian and other foreign stocks, the payment as part of the tender may take upto two weeks to be received and credited to your brokerage account.

  20. Ben

    Hey all, I read the tax section of the circular. To avoid being charged the full amount of the tender (i.e up to C$4.50 per share) as a taxable dividend (US holder here), one needs to meet the Section 302 Tests. I read the tests and I think there is a good chance I could meet at least one of those tests and have the transaction be considered a sale instead (which in this case would mean only be taxed on the capital gain instead of the entire tender amount). My question, is who makes that determination and when? I called IB’s tax team and they said most likely the distribution would be treated as a dividend for everyone and I would have to file the associated forms with both the Canadian (to get the withholding returned) and the US tax authorities. However the IB guy said sometimes those determinations are made by the company for each shareholder. I tried calling the Investor Relations number on AIM’s website and got sent to their completely full voice mail (guess lots of people have been calling). Any suggestions based on past experience? Of course, I could just not tender and hold/sell in the open market but I am trying to better understand the impact of tendering. Thanks!

  21. value_investor

    @Ben,

    Thanks a bunch for initiating this discussion. I went through the booklet ( particularly pages 42,43 and 44 ) and here is what I found :

    1. I pass the 302 test because I am tendering all my shares !!

    2. Because of statement # 1, my tendering is considered a sale and NOT a distribution.

    3. Because of statement # 2, I incur capital gains tax ( short term in my case ).

    Now here is the big black hole :

    1. I called Fidelity and asked them how exactly are they going to mark this txn as “all shares tendered” ? They have NO clue … and this is shocking to me … that the biggest brokerage in United States doesn’t know these things.

    2. I called the investor relations line at AIMIA .. they know more than Fidelity but when it came to the big question “How do we mark our txn as all shares being tendered .. hence meeting 302 test ” … she did not have an answer … neither did she know anything about if ( at all ) THEY are going to withhold the capital gains tax or let me handle it as part of the US Canada tax treaty ?

    3. I called and left a message for AST ( the depository and transfer agent ) … awaiting their call back.

    Given all the above, here’s my take on how to handle this ( personally .. just for me )

    1. No matter how clearly we understand ( based on the terms mentioned in the booklet ), that we should incur a capital gains tax and not dividend tax ( which is ridiculous … the cost basis for the dividend is 0.01 cents !! ) someone out there is going to hit us with the dividend tax withholding …

    2. Given statement # 1, we then are left with a complex tax filing procedure involving foreign tax credit and such …

    3. To me, it is just NOT worth it. I plan on keeping my shares and see how it goes … chances are that TOP price is set as purchase price … meaning US $ 3.35 . Also, given the tender is for 25% of shares, there is high probability of this being under-subscribed. These two factors should push the share value up to US $ 3.40 or higher in short term and significantly higher in longer term.

    1. na

      Thank you @value_investor for your thorough post. Your reading of the disclosure is the same as mine. The disclosure also appears to be boilerplate for Canadian tenders. However, I’ve always been warned by numerous people that somewhere along the way, a complete tender and sale was incorrectly treated as a dividend and the onus was on the individual to correct the situation. As a result, I’ve never participated in foreign tenders as a U.S. citizen.

      Thanks to your call into the various brokerages and Aimia and isolating the issue of how one might show they’ve met the 302 test, I have a better understanding why the tax treatment ends up being inconsistent with the policy.

      Please keep us updated on AST’s response.

      1. value_investor

        @na

        An email sent to AST was forwarded to AIMIA investor relations … and after a couple of reminders they came back today and … told me that I should consult my CPA / tax advisor … they ( AIMIA ) say that they provide some guidance in the booklet but the personal tax filing should be handled by advisor …

        Basically, in response to a very simple and clear question from me ( WILL short term capital gains tax be withheld on my share submit for tender OR will it be left to me to pay taxes here in united states ? And, how could Fidelity indicate that I submitted ALL my shares ), AIMIA has punted it back to me and my tax advisor !!

        I just have a hard time believing I get no answer after two weeks of effort and chasing down so many folks .. an investor with more deeper pockets might have taken these guys to task.

        Like I mentioned earlier, I shall hold on to my AIMIA shares for now. When the preliminary results of the tender offer are announced, I will pay attention and go from there.

  22. YVRtrader

    Credit Suisse over 7.5% now.

    They continue to buy today (321,600 shares so far today in first two hours of trading), which suggests to me that they do not plan to tender their shares, since shares purchased today cannot be tendered. We’ll know soon enough.

    1. YVRtrader

      Very interesting activity on AIM today. Credit Suisse continued to buy with a strong $4.25 bid (441,000 shares purchased today) until 12:59:00 Eastern time. 13:00:00 EST was the deadline to submit shares for tender at IB, and presumable others. Approx 12:59 they cancelled orders and the stock dropped to a low of $4.13 in 2 minutes.

      I spoke with IB and they said depending on the tender offer, it can sometimes be possible to submit shares that have not yet been cleared, meaning you can buy right up to the deadline. I always thought they had to be purchased 2 days ahead of the deadline to clear before being eligible. Perhaps old news to some, but new to me.

      If Credit Suisse indeed submits the shares they purchased today, I would be surprised if they would take a price below the $4.25 paid. Hopefully they do not tender their full position, but that now seems quite possible.

      1. nostradamus

        some tenders have “guaranteed delivery” as an option, others do not. when it’s enabled (IB CA tool shows this), stock don’t need to settle to tender. weird thing IB has it off for this tender, at least for the Canadian listing.

        1. YVRtrader

          Thanks Nostradamus, this confirms what IB told me when I followed up.

  23. YVRtrader

    Looks like they may have just taken a lunch break. A couple hours later they resumed buying, picking up another 188,000 shares. (629,000 shares purchased in total today)

    GLTA

  24. work 22

    fyi the Credit Suisse position is bought for multiple portfolio managers / hedge funds. so the position will not be tendered necessarily all at the same price as one etc. I would just think of it as a collective mob owning the stock. And yes sometimes they can buy right up to that deadline as you pointed out and still tender. always a bit risky on the logistics front though.

    Lastly, i see lots of back and forth on the tax. You almost certainly pay the tax on the .01 cent paid up capital to where you sold. Beware! Its simply not worth the risk.

  25. YVRtrader

    Ben – I subscribe to TMX Powerstream. “Net House Summary” shows each brokers buy and sell totals. And the broker code is displayed on the Time and Sales. Credit Suisse was all buys, literally zero shares sold yesterday, and they kept refreshing 25,000 share orders so it was likely one buyer.

    Looks like $4.30 for shares tendered. Hopefully this can trade like ECN after it’s offer, but I expect a selloff today. Hopefully I’m wrong.

    GLTA

  26. dt

    Tender Offer ended up oversubscribed by 65%.

    In terms of share count after the tender we will have:
    – 10m shares that were willing to sell at C$4.3 or below (8.5% of the total);
    – 12m shares that participated in the tender at premium to C$4.3 (10% of the total);
    – 27.5m shares owned by Mittleman (23.5% of the total);
    – 68m shares that did not participate in the tender (58% of the total);

    For me this type of shareholder distribution looks promising. However, unwillingness to tender might have been a result of unfavorable tax treatment of the distribution – dividend vs return of capital (see discussion above).

    Next catalyst – expiration of Mittleman standstill in July 2019. If Mittleman does not take any action afterwards then bridging the gap between the share price and SOTP valuation will prove difficult.

    1. dt

      Now it is clear that Mittleman will not stand on the sidelines going forward.

      Chairman’s behavior is definitely concerning (reminds a bit of how board meetings of famous frauds were described, but hopefully that is not the case here), but it will not matter if activist are able to replace the board.

  27. Ilja

    Mittleman has written a statement of defense and counterclaim seeking “an aggregate of CAD$125 million in compensatory and punitive damages for breach of contract and defamation as well as CAD$30 million in compensatory damages from current and former directors Jeremy Rabe and Robert E. Brown for tortious misrepresentations in connection with the sale of Aeroplan to Air Canada.”

    https://sedar.com/GetFile.do?lang=EN&docClass=8&issuerNo=00027127&issuerType=03&projectNo=02966203&docId=4590293

    1. davea500

      Thanks. Has anyone been able to find the actual court filing (the “statement of defense and counterclaim”) by Mittleman? If so, could you post a link?

  28. dt

    Aimia board agrees to call special shareholder meeting at the request of activist shareholder group.

    The date is set for 24th of Jan 2020 – so still almost 4 months away. It is very likely all 4 directors and management will be replaced with this meeting. It is strange that Aimia’s management agreed to this meeting without much of the fight.

    “The Meeting was requisitioned by a group of shareholders led by Charles Frischer, holding not less than 5% of the company’s issued and outstanding common shares. The requisitioning shareholders are asking Aimia shareholders to vote to remove four current directors and to replace them with four nominees of the requisitioning shareholders”

    https://www.sedar.com/GetFile.do?lang=EN&docClass=8&issuerNo=00027127&issuerType=03&projectNo=02972626&docId=4600088

    1. YVRtrader

      I was also expecting more resistance from the board, but apparently it’s a very thorough process to requisition a meeting in Canada compared to the US, so it could be that managements only option was to push the meeting to the latest allowable date. It will be interesting to see what they do between now and the meeting. A higher share price would help them make a case for keeping their jobs, although I believe the vote will be overwhelmingly against them. I wouldn’t rule out another SIB. Launching another SIB before the meeting would prop up the price for a month, which the BOD would try to take credit for, but shareholders won’t be duped.

      Of note, the CEO, Jeremy Rabe, was granted a ton of rights and options in August at $3.25. If he knows he’s going to lose his job, he may be more open to alternative strategies to boost the share price. Selling half of CDLX was a start.

  29. Zulu Investment Partnership

    Hi, would it be possible to buy GAPFF instead of directly buying on the Canadian markets? One just needs to adjust for currency rates, am I correct? Thanks for the update and information.

      1. Zulu Investment Partnership

        Has there been any liquidations or special payout of any sort? I can’t find anything in regards to AIM.TO but with that being the case, the SOPT by Mittleman would still stand at ~$5.68? (USD).

        The only issue is that there seems to be a lack of catalyst. It’s not clear what direction the company will go in strategically with the shareholders meeting months away still.

        1. Ilja

          There was a C$150m (C$3.8-C$4.5) tender offer in April-May.

          As I understand, large part of the discount for Aimia comes because of poor managerial performance, so the meeting is the catalyst now.

  30. dt

    Fantastic news for Aimia – settlement reached between Aimia, Mittleman and Charles Fisher.

    – All board will be reconstituted before February 2020;
    – C$62.5m common shares tender offer at C$4.25/share – 13.5% of outstanding shares.
    – C$62.5m preferred shares tender offer.
    – Mittleman will not participate in the common shares tender offer.
    – Previously announced special meeting has been cancelled.

    https://finance.yahoo.com/news/mittleman-brothers-announces-comprehensive-settlement-120500783.html
    https://www.newswire.ca/news-releases/aimia-announces-concurrent-substantial-issuer-bids-for-common-and-preferred-shares-for-aggregate-purchase-price-of-up-to-125-million-817970318.html

  31. dt

    From Mittleman Q3 letter. I understand this was written before the settlement:

    Aimia still has 100% upside to MIM’s conservative estimate of NAV.

    The announcement of Virgin Australia’s intention to buy back the 35% stake in its loyalty program (Velocity) held by Affinity Partners (a private equity group) at 11x EBITDA was very encouraging. It would seem to confirm MIM’s estimate that Aimia’s 49% stake in PLM, the 6.6M member coalition loyalty program of Aeroméxico, should not be worth less than 10x EBITDA, or C$607M.

    Further increasing MIM’s confidence in Aimia’s largest investment, PLM’s Q3 2019 results (as reported by AeroMexico) revealed increases across billings, members, earnings and dividends. This has roughly been the growth trajectory since the stock was purchased in 2010, despite a slowdown in growth in Mexico for the period. These results reaffirm the highly cash generative and discernibly recession proof nature of loyalty program businesses.

    Aimia’s stock at quarter end was C$3.38/US$2.55, and MIM’s estimated fair value is more than 100% higher at C$7.10 / US$5.44. The over-sized portfolio weighting in Aimia is supported by its debt-free balance sheet and net cash position of nearly C$500M.

    https://brookvine.com.au/wp-content/uploads/2019Q3_Mittleman-Global-Value-Equity-Fund_Quarterly-Report_Class-P.pdf

  32. nmeile

    What’s the current play here – participate in the tender offer or hope for better times?

  33. Martin Hernon

    As DT noted in today’s HCG write-up, tender offers by Canadian companies are a poisoned chalice for non-Canadian holders. I just read the offering circular for Aimia’s TO, and it makes it very clear that the difference between the C$4.25 offer price and Aimia’s paid in capital of C$.01 will be treated as a dividend to non-Canadians. So US holders would pay Canada through withholding C$4.24 times 15% (C$0.636) for each share accepted in the TO. Clearly an absurd policy and a punishing result.

    1. Ilja

      6 previous directors have stepped down and were replaced by 6 new independent directors. 4 out 8 seats now belong to the activists, who together own 32% of AIM. The board will be chaired by Charles Frischer (owns 5%). All in all, the new board should revitalize Aimia and now that the management’s interests are much more aligned with shareholders’, investors should expect some positive developments going forward.

  34. dt

    Here is my quick sum of parts calculation based on the latest results. Potentially a bit optimistic, but should be ok directionally:

    Cash – C$99m
    Investments in Corporate and Government bonds – C$154m
    Restricted and Escrow Cash – C$99m (relates to Aeroplan sale and disputes with tax authorities, all expected to be received back)
    49% PLM stake – C$560m (at 10x adjusted EBITDA. PLM Adjusted EBITDA has increased +12% during 2019, gross billings are up 10%)
    20% BIG stake – C$25m (using the price at which Air Asia acquired 25% stake back in 2016)
    C$850m in NOLs – ???? (various operating and capital tax losses and other potential deductibles across jurisdictions)
    Loyalty Solutions + Corporate – C$0 (currently still burning c. C$20m per quarter, but there should be some option value)
    Total Assets C$937

    Less liquidation value of preferreds – C$235m (9.4m shares at C$25/share. In the market these trade at c. 20%-40% discount, and in the recent tender offer preferreds were repurchased at 20%+ discount to liquidation value)

    Value of Equity = C$702m or C$7.4/share or more than 100% upside to current prices.

    To arrive at current market pricing of C$3.23/share I need to assume that Loyalty Solutions + Corporate will continue to bleed cash at current rate for the next two years (i.e. -C$160m), none of the restricted cash will be recovered and that PLM is worth 7.5xEBITDA. I think this is overly conservative.

    1. Zulu Investor

      Hi DT,

      How does one value NOLs?

      From my understanding, these are basically “tax shields” and their value comes from allowing Aimia to be shielded from Net income tax. I may be over simplifying it, but since it provides a tax shield for $850m, would the inherent value be 850m x 26%, or 221m? (26% is the approx tax rate.)

      Please correct me if you feel differently.

      1. jwestern

        That’s the way I saw it, discounted based on how far into the future those earnings will occur. I believe the tax rate would also vary between different jurisdictions in which they’d have to report.

  35. jwestern

    Airlines taking a hit from COVID — is there much exposure for this idea?

    1. dt

      Aimia’s exposure is not directly to the airline but rather to Airline’s loyalty rewards program. But indirect exposure is obviously there – the less people fly the less points/miles they accumulate (lower revenue for PLM) and in recessionary environment they are more likely to start redeeming the points/miles (higher cash expenses).

      Whatever happens to AeroMexico in the short term, I do not think will have a long term affect / impairment of the loyalty program.

      Having said that, with markets in panic any strategic moves to unlock the sum of parts value are most probably postponed.

      1. Zulu Investor

        Beside the postponement do you see the intrinsic value of it being affected? Would you still feel that the SOPT PT thesis is still the same for the most part?

  36. Zulu Investor

    Can anyone provide updates to Aimia for today? Seems like there has been significant progress towards realizing the SOPT value of Aimia.

  37. dt

    Aimia has changed for the good. I was waiting for the quarterly call before sharing my thoughts.

    Overall I think the governance and strategic developments over the last month have been very positive. And I think were it not for the covid-19 situation Aimia would be trading materially higher than Feb’20 levels.

    Over the last month Aimia has been fully transformed from the operating company of loyalty businesses with some side investments into fully fledged investment holding company with Phil Mittleman at the helm and slimmed down personnel (from 450 to 20). The latest presentation outlines the situation pretty well – https://corp.aimia.com/wp-content/uploads/2020/05/Aimia_Q1-2020-Highlights-vF.pdf.

    Pro-forma for all the contemplated transactions Aimia now has 6 assets:
    – Mittleman Brothers Management company (100%)
    – PLM or Club Premier (49%)
    – Kognitiv (49%) – where all cash burning loyalty operations have been transferred
    – Air Asia BigLife (20%)
    – Clear Media (10%)
    – C$190m in cash

    My thoughts on how to value each of these are outlined below.

    Mittleman Brothers Management Company (C$7m).
    Aimia paid US$5 in cash and 4m in Aimia shares for this acquisition, so in total around C$17m using current share price. Mittleman Brothers has only US$200m of AUM. It is a small scale asset manager and the valuation is clearly not supported by the expected management fees. I do not fully understand why this acquisition was necessary and what benefits it brings to the table (it also screams conflicts of interest), but it might have been a necessary condition to get Phil to run the show with Aimia’s capital. To be conservative I value this at 2.5% of AUM (quick rule of thumb for asset managers) which is C$7 and coincides with the cash portion paid for it.

    PLM or Club Premier (C$350)
    Aeromexico and PLM signed binding letter of intent extending the loyalty contract till 2050. Also Aeromexico received an option to acquire Aimia stake at 7.5x adjusted EBITDA with US$400m minimum (previously Aeromexico proposed to buyout Aimia’s the stake at US$250m). And finally, PLM loaned/advanced US$100m to Aeromexico to help it through these difficult times. I do not put much into this ‘US$400m minimum’ as it is an option for Aeromexico, rather than an intention, and airline industry needs to return to normality before any kind of transaction could be contemplated. Also 7.5x adjusted EBITDA is well below 10x valuation previously pushed by Mittleman. Finally, I think this 7.5x level was agreed in order to calculate compensation in case Aeromexico fails on it’s $100m advances from PLM (as it was secured by Aeromexico’s 51.1% equity in PLM). So in my eyes, aside from contract extension there is nothing positive in the announced PLM transactions, even-though during the call Phil tried to put a very positive spin on it. To be conservative and account for the fact that airline industry is currently very far from normality, I am valuing PLM stake at US$250 (or C$350), i.e. what Aeromexico was willing to pay for it couple years back.

    Kognitiv (C$21m)
    This was the biggest positive development. Cash burning loyalty solutions business was merged with private Kognitiv. I do not have an opinion on the prospects of the merged company, but as I see it, Aimia paid only C$21 (in convertible preferreds) to push this cash burning business out of the P&L and still retained 49% upside if something good comes out of it. Investors were assigning negative value to this segment anyways, so seems like a very small price to pay for optionality. Management also presented this as a win win for both companies with complimentary business models and numerous revenue synergies. Also as a big positive is that previous Kognitiv investors are injecting another C$14m into the merged company and also concurrent financing transaction (I understand this refers to financing raised by Kognitiv) implies merged company valuation of C$525m (so Aimia’s stake would be C$260m). On the call management compared current structure to the success they had with Cardlytics. To be very conservative I value Kognitiv’s stake at only C$21m which is the new cash that Aimia had to inject.

    BigLife (C$0)
    No information was provided on this business, so to keep things simple, I value it at zero.

    Clear Media (C$75m)
    Aimia has acquired 10% stake in Clear Media buy paying the same price as current going private offer for the company (HK$7.12) per share. Mittleman was a long time (7 years) investor in Clear Media and you can find their last year’s write-up on VIC (https://www.valueinvestorsclub.com/idea/Clear_Media_Ltd./5685044499). Price paid for the company implies 5.5x normalized EBITDA, which sounds very reasonable for the largest bus shelter advertising panel operator in China, that has paid out substantial dividends over the last decade. But most importantly, Aimia is participating in this going private transaction alongside Clear Media CEO, Ant Financial (i.e. Alibaba and Jack Ma) and JCDecaux (largest outdoor advertising company) all of which are paying the same price per share. As it was explained on the call, connections of those involved should put Clear Media on a fast growth path. And the seller with 50.9% stake is Clear Channel Outdoor, which apparently is facing liquidity crunch and is potentially giving this asset away at fire sale price. So I would think that C$75m that Aimia paid for 10% stake should be money good.

    All together this sums up to: C$643m in assets (very conservative estimate, with hardly any upside taken into account, aside from assuming Aeromexico does not turn belly up):
    – Mittleman Brothers Management company (C$7m)
    – PLM or Club Premier (C$350m)
    – Kognitiv (C$21m)
    – Air Asia BigLife (C$0)
    – Clear Media (C$75m)
    – Cash (C$190m)
    Total Assets C$643m (or C$6.5/share)

    On liability side Aimia has C$231m of par value in preferred equity and ongoing overhead expenses of C$15m per annum. Preferreds could probably be treated as perpetual debt with 5.5% interest rate. On the call management mentioned that both the preferred dividend as well as ongoing overheads should be fully covered by the dividends from PLM. If that is indeed the case, then conservative valuation of Aimia shares is C$6.5.

    And even deducting the full value of preferreds, I arrive at equity valuation of C$4.2/share. I do not think annual overheads needs to be capitalized as negative asset in SoTP calculation, as I believe Mittleman will create value in excess of $15m per annum (which is only 2.5% of assets).

    I am still long and have added to my position as I do not think market recognizes how transformative the transactions over the last month have been.

    Where I might be wrong? The biggest risk is valuation of PLM as this fully depends on the recovery of the airline industry and Aeromexico in particular. However, PLM has strong balance sheet (seems like another $80m of cash will be left after advances to the airline) and appears to be well positioned to sustained prolonged downturn. However, if Aeromexico files for bankcruptcy, outcome for PLM becomes uncertain.

    Interested in hearing other oppinions.

    1. jwestern

      What about the net operating losses? Has the Kognitiv transaction monetized the NOLs?

      1. dt

        I do not think Kognitiv transaction has monetized NOLs. During the call management has mostly talked about capital gain losses and how they are going to monetize those in the future. Press release also mentions:

        “Aimia will consider investments that may efficiently utilize the Company’s approximately $700 million in operating and capital loss carry-forwards to further enhance stakeholder value.”

        In any case, at least for me NOLs are insignificant part of the thesis – having investments that generate profits or capital gains is so much more important.

  38. jwestern

    From AeroMexico’s 1Q20 ( https://aeromexico.com/cms/sites/default/files/Aeromexico_1Q20.pdf ) it doesn’t look like the $100M loan buys them a lot more time. That’s a bit less than 1 quarter worth of net losses at the current loss rate. Their cash position can handle about 4-5 quarters at the same loss rate. So we’re talking about being able to survive about 1.5 years of pretty brutal times.

    Meanwhile, here’s what Covid “new daily cases” curves look like on a 7-day moving average sorted by country population in Latin America (subject to all the uncertainties of such reporting) from e.g. https://www.worldometers.info/coronavirus/country/brazil/ :

    Brazil: appears flat as of last week.
    Mexico: linear growth.
    Colombia: exponential growth.
    Argentina: exponential growth.
    Peru: appears flat as of last week.
    Venezuela: flattening? numbers are scarce…
    Chile: rising linearly for last two weeks.

    So new daily cases don’t seem to be flattened out yet overall. But given the time frame of flattening we’ve seen in the U.S. and elsewhere, I’d be a little bit surprised if deep dislocation of AeroMexico’s business lasted for more than 1 year from now.

    Based on this I feel the odds favor no bankruptcy for AeroMexico. If the rate of losses accelerates from 1Q20 however, those odds could easily invert.

    Even assuming PLM goes to zero though, by easing up on some of the other extremely conservative valuations in dt’s SOTP, it looks to me you still don’t lose money on an Aimia investment at the current price.

    What do y’all think?

    1. Zulu Investor

      How will Aeromexico bankruptcy affect this?

      Will PLM’s value (c 350m) be affected at all? PLM, if I understand it correctly lent 100m to Aeromexico, and it should be okay since there with Aeromexico’s stake in PLM as collateral.

      And the option to buy PLM… how does this all work now with Aeromexico declaring bankruptcy? If anyone could put some colors to how terms have changed for companies entering chapter 11, it would be highly appreciated!

      1. AFPond

        In an interview Phil Mittleman had with TD Securities on June 25. When asked about the Aeromexico bankruptcy risk, he said Aimia had structured the loan transaction as if Aeromexico was going in to Chapter 11 next week, and that there are multiple forces (PLM being the only cash flow support, Delta’s 49% stake in equity etc.) that allow sufficient protection in place.

        Michael Lehmann was also present at the interview alluding that PLM could be a bankruptcy remote (citing other airline bankruptcies where the loyalty programs were).

        You can find the interview on their IR website

        1. jwestern

          Could you link the interview? I can’t find it.

  39. dt

    As expected, C$67m escrow connected with the Aeroplan sale was released.

    “With a debt free balance sheet and $190 million in cash and liquid investments, the company will continue to execute its strategy of acquiring long-term investments in public and private companies, on a global basis, through controlling or minority stakes, targeting companies with a well-established track record of substantial free cash flow generation.”

    https://sedar.com/GetFile.do?lang=EN&docClass=8&issuerNo=00027127&issuerType=03&projectNo=03086221&docId=4765077

  40. dt

    Aimia’s Q2 report was released last week and the market has taken it positvelly (shares up +15% since then). No material changes to my sum of the parts analysis as outlined in the comment on the 14th of May. The valuation of PLM’s stake is the biggest question mark and the largest uncertainty.

    Q2 fillings show that PLM has generated C$15m of FCF (excluding the $50m ticket prepurchase) during the quarter, significantly lower than last quarter, but still a positive result given the halt in the airline industry. Comments from Phil Mittleman’s were rather upbeat:

    While we continue to seek investment opportunities around the globe, our immediate focus is our current portfolio of existing investments, including maximizing the value of PLM and BIGLIFE. Despite the COVID-induced crisis that has plunged the airline industry into disarray, both of our travel-loyalty investments, PLM (Aeromexico) and BIGLIFE (AirAsia), generated positive operating cashflow in the quarter – a testament to the resilience of the coalition business model in the face of the worst downturn the airline industry has ever experienced. We believe loyalty programs are the most valuable part of an airline’s ecosystem and can serve an instrumental role in creating value and liquidity for the airline during distressed times. As 49% owners and board members of PLM and 20% owner and board member of BIGLIFE, we recognize the substantial value inherent in these businesses.

    As previously announced, the company expects PLM to continue to be negatively impacted by COVID-19, resulting in materially lower gross billings, adjusted EBITDA and cash flow for the remainder of 2020. Consequently, Aimia does not expect to receive future distributions – further distributions from PLM in the second quarter of this year – second half of this year. We expect the impact of COVID to be transient and not a permanent impact to PLM’s business as evidenced by positive operating cash flow during the quarter. We continue to closely monitor the evolving Chapter 11 process and are working collaboratively with Aeromexico, PLM and their advisors on achieving the best outcome for Aimia.

    While the timing of a return to pre-COVID airline travel and PLM profitability levels remains uncertain, we have seen recent positive trends at PLM. We expect the PLM business to slowly ramp back up as more travel and leisure restrictions are lifted.

    Regarding the Aeromexico bankruptcy, it was stated that “financial restructuring of Aeromexico is still ongoing and it is too early to assess the final outcome and impact on PLM and Aimia”.

    Aimia continued to buy back its stock in the open market ($4.5m in Q2 + another $4.5m post Q2 at prices of around C$3/share). Management has also been quite active in acquiring shares during March/May sell-off (most purchases around C$2-C$2.5/share):

    Lastly, beyond just authorizing share buybacks, management and directors personally bought more than 1 million shares purchased in the open market during this tumultuous year, showing our unwavering confidence in Aimia’s current value and future prospects.

    1. jwestern

      Now I’m confused. Who is Apollo? I thought Aimia’s loan to Aeromexico (through PLM) was secured by Aeromexico’s stake in PLM. Now Aeromexico’s stake secures Apollo’s loan?

      1. dt

        It is likely that only the excess value of the Aeromexico PLM stake (what was not pledged as collateral before) is part of the new DIP financing agreement. However, I am not 100% sure and I do not think it makes a big difference for the Aimia investment thesis.

        The bigger question is what will be Apollo next moves towards PLM and Aeromexico.

  41. dt

    As part of year-end portfolio review, I have decided to close out Aimia’s position and remove it from active SSI ideas.

    The discount to sum of the parts remains wide (35%), but given the risk associated with PLM some of it is definitely warranted now. Overall, the whole thesis has changed several times during these 2.5 years and now it lies in the recovery of Aeromexico/PLM, which is difficult to handicap. With the timing being quite uncertain at this point, I think it is time to finally close this idea with a modest +21% gain in 2.5 years.

Leave a Reply