NEW YORK, Aug. 6, 2018 /PRNewswire/ --
Board of Directors
Aimia Inc.
525 Avenue Viger West, Suite 1000
Montreal, QC H2Z 0B2
Canada
Re: Recent offers for Aeroplan and PLM
Dear Sirs and Madam:
As the Chief Investment Officer for Mittleman Brothers, LLC,
which is Aimia Inc.'s largest shareholder with a 17.6% stake, I
feel compelled to share my opinion of the offer for Aeroplan
announced on July 25th
(revised and expired Aug.
2nd), and the offer for PLM announced on
July 26th (wisely rejected
by you on same day). The views expressed here are mine alone,
but I've had unsolicited calls from many shareholders since
July 25th, with estimated
ownership of 20% of Aimia's stock, who related opinions on these
matters that largely concur with my own views.
I share my convictions with you publicly now so that all
interested parties may have a more complete understanding of the
expectations on valuation of a large number of Aimia's
owners. I do not purport to speak for the Board or any
director, and I don't intend to interfere in your process, nor do I
attempt to instruct or demand any action on your part. I
merely mean to inform in hope of assisting you in achieving the
best outcome for all of Aimia's stakeholders.
In my opinion, the offer for Aeroplan from the Air
Canada-TD-CIBC-Visa consortium was misleading, coercive, and
blatantly inadequate. I applaud the Board for not acquiescing
and continuing negotiations. But, if fair value is not
forthcoming from this group, then let Aeroplan pursue the strategy
that Aimia's new CEO, Jeremy Rabe,
previewed so convincingly on July
20th, which appears to be a major improvement
upon the existing Aeroplan program, and a huge relief to concerned
members. The potential deal with the Oneworld airline
alliance (American Airlines, British Airways, Qantas, JAL, and
LATAM among others) revealed on Aug.
1st, and the Porter Airlines deal announced
Aug. 3rd, would clearly
boost the value of Aeroplan beyond 2020.
The offer was misleading in that it claimed that the
C$250M cash offer (raised to
C$325M) for Aeroplan equated to a
C$2.25B (C$2.325B) total purchase price due to the
assumption of approximately C$2B of
Aeroplan's points liability. But, that deferred revenue is a
negative working capital benefit that renews and rolls over as long
as the business remains a going concern. I can find no
precedent where it was treated as a charge to enterprise value in
similar M&A transactions. It is disingenuous for the
consortium to argue otherwise, and misleading to conflate it with
the purchase value in this offer. Also, the stated cash value
of the offer itself would have been severely reduced by various
adjustments, leaving little net cash paid to Aimia for selling one
of the world's largest and most successful coalition loyalty
programs.
When Air Canada bought Canadian Air in December 1999, the enterprise value was
C$937M, consisting of C$92M in equity, C$59M in preferred equity, and C$786M in debt, with no mention or monetary
allowance for the 3M members of
Canadian Air's frequent flyer program, "Canadian Plus," and its
sizable points liability. The liability was assumed, and the
points were honored 1-for-1 with Aeroplan points, but the points
liability was not mentioned or considered as extra consideration to
the seller. Aeroplan membership grew from 2M to 5M in that
deal.
When American Airlines Group bought US Airways Group in 2013,
the fairness opinion provided by Barclays did not adjust enterprise
value or consider in any way the US$1.12B in frequent flyer miles liability of
U.S. Airways' "Dividend Miles" program and its 30M members. Nor did Barclays consider such
liabilities in establishing the enterprise values of their chosen
comparables group. These liabilities are identified from an
accounting perspective, but they are assumed much as any naturally
occurring negative working capital balance would be, without
claiming the assumption should be considered incremental merger
consideration to the seller.
On January 27, 2003 Onex Corp.,
led by the legendary investor Gerry
Schwartz, announced a deal to buy 35% of Aeroplan from Air
Canada, for C$245M, an equity
valuation of C$700M, plus
C$200M in retained debt, which made
the enterprise value C$900M.
Gerry Schwartz said then, "We view
Aeroplan as the gem within Air Canada…" No mention of the
points liability was made in that announcement, nor considered in
the stated C$900M enterprise
value. Furthermore, that valuation was 1.5x Aeroplan's gross
billings of C$600 in 2002, 40% of
which came from Air Canada. Adjusted EBITDA was C$108M in 2003, a 17.3% EBITDA margin on
C$625M in gross billings that year,
and thus a C$900M EV was 8.3x
EBITDA. That deal did not close because Air Canada went
bankrupt shortly after the deal was announced.
Aimia's most recently reaffirmed guidance (page 39 of Q2 2018
results presentation) for Aeroplan shows C$1.3B gross billings, adjusted EBITDA of
C$234M (18% EBITDA margin), after-tax
FCF of just over C$100M, with Air
Canada representing 20% of gross billings (versus 40% back in
2003). At the same multiples Onex Corp. agreed to pay when
Aeroplan was twice as dependent upon Air Canada in 2003, 1.5x gross
billings and 8.3x EBITDA, Aeroplan today would be valued at
C$1.94B, vs. the very soft
C$325M last offered.
When Aeroplan (now Aimia Inc.) IPO'd on June 29, 2005, with ACE Aviation Holdings (former
parent of Air Canada) selling 28.75M
shares of Aimia at C$10.00 per share,
the enterprise value was C$2B, which
was a fairly rich valuation of 15x EBITDA of C$132M (TTM). If the C$863M in points liability then was also tacked
on to the enterprise value, it would have been 22x EBITDA.
And two secondary offerings, 22M
shares at C$21.90 on 10/22/07, and
20.4M shares at C$17.50 on 4/21/08, combined to raise
C$930M at very high valuations, along
with C$1.68B in Aimia shares
distributed to ACE shareholders in 2007, means Air Canada's former
parent reaped C$2.61B from their
investment in Aeroplan before considering cash dividends received,
which were substantial. And later when Air Canada was
skirting near the brink of a second bankruptcy in 2009, Aimia
provided a critical C$150M loan to
help Air Canada avoid that fate. Aeroplan has been an
outstanding partner to Air Canada.
In October 1999, CIBC paid Air
Canada C$200M to extend their
participation in Aeroplan for another 10 years until 2009.
C$200M, not to buy out the entirety
of Aeroplan, just to maintain their participation in it for another
10 years. Then in 2003, despite Air Canada being in
bankruptcy, CIBC apparently saw demand and earnings on its
co-branded Aeroplan Visa cards good enough to agree to pay 19% more
for rewards miles and advance C$350M
to Air Canada to assist in its reorganization. Presumably
Aeroplan members will find multiple airline redemption options in
2020 at least as appealing as they found a bankrupt Air Canada in
2003.
At the nominal valuation of the most recent offer, C$325M, the multiple is 1.4x EBITDA (C$234M guidance for 2018 in Q1 2018 presentation,
page 32). And the consensus estimate for 2021 (as per
Bloomberg) is C$136M, so only 2.4x
EBITDA for the first full year on stand-alone basis, and 3.3x the
C$100M EBITDA estimate I am using for
2021. And while reasonable people can have significant
differences of opinion on the inherently subjective matter of
valuation, I think 1.4x to 3.3x EBITDA is clearly beyond the bounds
of any conceivable range of reasonableness for a business that has
proven to be such a huge generator of cash for so many years, to
the very parties seeking to buy it now, for a miniscule fraction of
what they've already taken out of it.
Aeroplan is the lynchpin in the nexus of this powerful network,
where TD, CIBC, Visa, Amex, and Air Canada generate hundreds of
millions in net profits annually from their Aeroplan card
holders. Before TD bought roughly half of CIBC's
Aeroplan-linked credit cards in late 2013, CIBC reported that its
Aeroplan cards produced C$380M in net
profit in the 12 months ending 7/31/13, 12% of overall
profits. Given consumer credit in Canada is up about 20% since then, one could
easily infer that those cards (now split between TD & CIBC)
generate north of C$450M in annual
profits now. TD and CIBC trade at around 11x earnings now, so at
that multiple of 11x those Aeroplan cards are worth about
C$5B to just those two
companies. I estimate that C$7B
to C$10B in total value is at stake
in preserving this economic ecosystem for all partners, for which
Aimia could easily extract C$2B to
allow it to be renewed and extended coincident with the cashing out
of Aimia's ownership going forward. C$2B is less than 10x EBITDA for Aeroplan
currently. I can find no example of a major coalition loyalty
program changing hands for less than 10x EBITDA in the past 20
years; why should Aeroplan be the first? (the Onex deal for
Aeroplan at 8.3x EBITDA in 2003 did not close, and was only offered
so cheaply because Air Canada was in dire straits, and went
bankrupt 3 months later.)
In writing to my clients about Aimia, I have used a very
conservative value of C$1B for
Aeroplan, which was quoted in the press recently. But that
valuation is based on my most conservative estimate of C$100M in EBITDA post-2020 on a standalone basis,
and not reflective of any control premium. The strategic
value of Aeroplan is clearly much greater than its stand-alone
value to Aimia. Thus, a compromise between what it's worth to
Aimia, at certainly no less than C$1B, and what it's worth to the consortium, at
C$2B+, seems reasonable. That is 4.3x to 8.6x EBITDA of
C$234M currently, versus 10x to 20x
EBITDA of C$100M in 2021 to a buyer
other than Air Canada, and really less than 10x to 20x given the
much higher EBITDA and FCF in the next 2 years would reduce the
effective multiple significantly for the buyer closing in 2018.
If Aimia cannot obtain at least the stand-alone value of
Aeroplan, C$1B, plus a modest control
premium of 20%, then I'd prefer Aimia not sell it. Aimia has
the resources to manage whatever likely cash burn may come, if any,
during the transition period with current cash, bonds, and liquid
securities worth C$616M on 6/30/18,
at 32% of the points liability of C$1.957B, a healthy reserve ratio that will be
further enhanced by C$200M in net
after-tax FCF expected over the next two years, and the potential
sale of its 49% stake in PLM for a real multiple of no less
than 10x EBITDA, which would be C$490M based on US$77M in EBITDA for 2017, which would bring the
reserve ratio up to 66%. Aimia has functioned since 2005 with
an average of C$400M in cash reserves
earmarked for redemption liabilities, and the reserves were never
touched. Even during the 2003 bankruptcy of Air Canada, there
was no run on the bank. Aeroplan never had an annual period
in which it burned cash then or thereafter. Of its current
C$330M in debt, the C$250M in 6.85% senior secured notes due
May 17, 2019 was $99.30 just before the consortium offer was
announced, indicating no market concern about refinancing (current
price $101.21).
Aimia's new CEO, Jeremy Rabe, is
a proven executive in the loyalty arena and well-suited to run a
major coalition loyalty program like Aeroplan. His strategy
is clearly sound and already making progress. I believe
Aeroplan in 2 years will be a more attractive program than it is
today, and today it has got very high engagement as evidenced by
its very low breakage rate, and a loyal and long-term user
base. Aimia need not be entertaining offers for Aeroplan at
1.4x or 3.3x EBITDA, especially from partners to which it has
provided such outstanding financial returns.
In matters of valuation there is always a degree of subjectivity
on inputs, assumptions, multiples, margins, growth, discount rate,
etc. But there are limits. And veering too far from
those limits takes one into the realm of ridiculousness, and
posturing. The Air Canada-TD-CIBC-Visa consortium bids for
Aeroplan were deep into that realm at C$250M-C$325M; a
"shock and awe" tactic designed to incite panic and anchor
expectations to an absurd level. Rather than some of the
biggest and best-known corporate entities in Canada, the consortium seems here more like a
group of school yard bullies, trying to force a smaller kid to give
them his bicycle, "give it up by 5:00PM next week, or we will dismantle it and
take the parts to make a new one for ourselves."
Air Canada cannot on one hand
claim that its non-existent loyalty program will have an NPV of
C$2B, but then on the other hand
claim that Aeroplan's well-established, FCF-generating,
5M member giant is worth less than
C$1B. And for Air Canada
to claim their offer was "generous" at a premium to the recent
trading price, after they were much to blame for the recent low
trading price given their May 11,
2017 announcement saw Aimia's share price drop 63% that day,
is absurd, and the short fuse expiration of the offer, clearly
coercive. Also, TD was called out by Aimia CFO Grafton on the
Q1 2018 results conference call for significantly reducing
promotional spending on the card since June
2017, apparently, as we now see, in advance of trying to buy
Aeroplan on the cheap. While I'm not qualified to opine on
questions of legality, the pattern of behaviors here is
disconcerting to say the least. I hope that will change
now.
Touching on PLM more briefly, the Board was right to reject it
immediately, given the US$180M offer
was obscenely low, a US$367M EV or
4.8x EBITDA of US$77M. The last
time Aimia invested in PLM was 2012, when Aimia paid US$88M for an additional 20% stake at an EV of
US$440M, an agreed upon 15% discount
to the then agreed-upon valuation of US$518M for PLM. That valuation was based
on a TTM gross billings number of US$115M for PLM from Oct.
2012, and adjusted EBITDA margin of 30%+, so at least
US$35M in EBITDA. So,
both parties agreed it was worth 14.8x EBITDA then, and Aimia paid
12.6x EBITDA to invest more into then, but now with EBITDA more
than doubled since then, Aeromexico offers to buy PLM for only
US$367M, or 4.8x EBITDA? And to
cite that the management contract will expire in 2030 (12 years
from now) as a pressure point was quizzical, as Aimia's 49%
ownership in PLM does not have an expiration date. PLM has
excellent growth prospects, I hope Aimia will hold it as long as
possible.
Our sum of the parts valuation for Aimia is C$10.00 (USD 7.50),
which is 2.7x today's price:
Aeroplan (Canada): ownership
(100%), estimated min. fair value = C$1B, 4.3x C$234M
EBITDA est. 2018, 10x C$100M EBITDA
post 2020 = C$6.57 per share
(ignores the C$2B miles redemption
liability for purpose of enterprise valuation, as airlines don't
charge frequent flyer liabilities to EV in their M&A
transactions, viewing it as an ongoing negative working capital
benefit as long as business is a going concern, and a substantially
reduced cash cost in a liquidation / run-off scenario which we view
as extremely unlikely.) Aeroplan likely has strategic value
well above our C$1B minimum estimate
in that its 5M+ members and its key commercial contracts occupy a
critical role at the nexus of a very valuable economic ecosystem
involving TD Bank, CIBC, Visa, Amex Canada, and Air Canada, which
have hundreds of millions of annual profits at stake in preserving
it.
PLM Premier (Mexico): ownership
(48.9%), est. fair value = US$489M,
10x US$100M EBITDA est. 2019 =
US$3.21 per share 5.7M members in fast growing coalition loyalty
program anchored by Aeromexico, Mexico's flagship airline. Aimia
invested US$124M for 48.9% stake
between 2010-2012, and since then received US$84M in cash dividends. At last financing
round in 2012, PLM total enterprise was valued at US$518M, and it has grown a lot since then.
Comps: Smiles Fidelidade S.A. (SMLS3 BZ) and Multiplus S.A. (MPLU3
BZ) trade about 7x EBITDA, down sharply in emerging market
sell-off, but fair value likely closer to 10x EBITDA for both.
Cardlytics (CDLX): ownership (2.978M shares), price on 6/30/18= $21.76 = USD 65M = US$0.43 per share
Think BIG Digital – Air Asia: (20%), est. fair value = USD 50M, US$16 x
16M members = US$0.33 per share
Fractal Analytics (USA):
(5%), est. fair value = US$18M (5% of
$360M (=6x $60M sales) = US$0.12 per share
Assets (excluding cash) = C$1.817B =
C$11.93 / US$9.07 per share
(+ cash & bonds C$531M –
C$45M working cap. need– C$330M debt – C$43M
pension deficit – C$323M preferred –
C$34M accrued interest) =
-C$244M
NAV: = C$1.573B / US$1.201B / 152.3M shares = C$10.33 / US$7.88
per share (CAD/USD = 1.31 as of 6/30/18)
I can only advise the Board, not dictate to it, but I hope I've
shown here that it is obvious that Aimia should not accept less
than C$1B net for its core asset,
especially not with a gun held to its head by its key commercial
partners, for whom Aeroplan has been such a tremendously productive
partner for so many years. Gerry
Schwartz of Onex was clearly right to describe Aeroplan as
"the gem within Air Canada" when he tried to buy 35% of Aeroplan
back in 2003 at 8.3x EBITDA. For the 12 years from 2006 to
2017 inclusive, Air Canada had a cumulative C$3.5B in cash burn (negative FCF), while Aimia
(mostly due to Aeroplan) generated a cumulative C$2.8B in FCF over those same 12 years, both
stats according to Bloomberg. If Air Canada wants to buy back
this gem that they sold from 2005 to 2008 for more than 15x EBITDA
(and cumulative proceeds of $2.6B),
they should expect to pay a fair price. Since Aeroplan is
clearly a superior business, it cannot be worth less than the
valuation at which Air Canada itself trades today in the open
market, which at C$23.73, is an
EV/EBITDA of 5x (adding pension liability), and market cap. to FCF
of 11x. Aeroplan at those multiples would be about
C$1.2B.
I hope you find my ideas here useful. On behalf of all
Aimia shareholders, I wish you good luck.
Sincerely,
Christopher P. Mittleman
Chief Investment Officer - Managing Partner
Mittleman Brothers, LLC
SOURCE Mittleman Brothers, LLC