PrefBlog

Aimia has received another bid for some of its assets:

Aimia Inc. has received its second hostile bid in as many days − this time for its large stake in Mexico’s leading frequent-flyer program.

The day after Air Canada launched a hostile offer for Aeroplan, the loyalty-rewards program owned by Aimia, Grupo Aeromexico announced its own bid to acquire Aimia’s 49-per-cent stake in PLM Premier for US$180-million, or $235-million.

PLM runs Club Premier, Mexico’s frequent-flyer program, which has partnered with national airline Aeromexico. The airline already controls the majority stake in PLM.

Aimia turned down the offer in a matter of hours, arguing that Aeromexico undervalued the asset.

Aeromexico’s press release highlights the unusual circumstance that Aimia will actually have made some money on its investment:

Grupo Aeromexico (“Aeromexico”) informs that, as a current shareholder of 51.145% of PLM Premier, S.A.P.I. de C.V. (“PLM”), it has made a non-binding proposal for the acquisition of the shares currently held by Aimia Inc (“Aimia”), representing 48.855% on a fully diluted basis, of the outstanding shares of capital stock (the “Stock”) of PLM (the “Proposed Transaction”) for an amount of $180 million US dollars. This amount, including dividends and marketing fees paid to Aimia since its investment, represents an annualized rate of return for Aimia of approximately 18%.

And, as noted in the news story, Aimia scorned the idea:

Aimia Inc. (TSX: AIM), a data-driven marketing and loyalty analytics company, today confirms that it has received a non-binding offer (the “Offer”) from Grupo Aeromexico S.A.B. de C.V. (“Aeromexico”) to acquire for US$180 million Aimia’s 48.855% stake in PLM Premier, S.A.P.I. de C.V. (“PLM”), the owner and operator of Aeromexico’s Club Premier frequent flyer program. Aimia also announces that it has formally notified Aeromexico that the Offer has been rejected.

The Company has promptly rejected the Offer as it believes that its stake in PLM is worth significantly more than the Offer price, which reflected no improvement whatsoever to the terms previously proposed by Aeromexico to Aimia in prior discussions between the parties. By way of reminder, PLM generated Adjusted EBITDA of US$77.4 million in 20171 and the current contract term between PLM and Aeromexico runs to 2030.

All this follows yesterday’s bid for the Aeroplan Canadian operation. I’m not sure why the newspapers persist in calling these ‘hostile bids’. It’s unusual that they’re public, of course, but management and the board have sole discretion regarding what to do, as far as I understand it. Shareholders will not get a vote.

AIM preferreds jumped on the news:

All three issues are tracked by HIMIPref™ but are relegated to the Scraps index on credit concerns.

Note that the bids are not for the company, just for most of its assets. If successful, the bid will change the balance sheet significantly – and just how good the preferreds will look at that point will be the topic of much speculation and puzzling over the balance sheet.

Air Canada wants Aeroplan back:

Air Canada has made a hostile bid to buy back Aeroplan at a heavily discounted price, 13 years after it spun off the popular Canadian loyalty rewards program.
…
Rather than starting from scratch, the airline and its partners Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Visa Canada Corp. are now offering to pay $250-million in cash to Aimia for a program that in 2005 had a $2-billion valuation through an initial public offering.

In response to Air Canada’s announcement, Aimia’s stock surged on Wednesday, climbing 36 per cent. Air Canada’s shares had a much more muted reaction, rising 1.4 per cent.

In the the offer announced Wednesday, Air Canada and its partners would assume a $2-billion outstanding liability on Aimia’s books for loyalty points that have not yet been redeemed. Aimia currently has $300-million in cash reserved to cover these liabilities.

Air Canada has set up a Q&A page on their website in addition to the consortium’s press release:

Air Canada, The Toronto-Dominion Bank (“TD”), Canadian Imperial Bank of Commerce (“CIBC”), and Visa Canada Corporation (“Visa”), on behalf of a corporation to be formed, have made a proposal to Aimia Inc. (“Aimia”) to acquire its Aeroplan loyalty business (including approximately $2 billion of Aeroplan points liability at March 31, 2018) for $250 million in cash (the “Proposed Transaction”), representing a total purchase price of approximately $2.25 billion.

The Proposed Transaction, if accepted by Aimia, will ensure value and continuity for their members as well as customers of Air Canada, TD, CIBC and Visa. The proposal implies an estimated market equivalent value of $3.64 per Aimia share, a 52.3% premium to the 30-day VWAP and a 45.6% premium to spot closing price as of July 24, 2018. The market equivalent value is comprised of the Aeroplan loyalty business proposal value of $1.64 per Aimia common share plus non Aeroplan loyalty program net assets valued at $2.00 per common share based on fair market value estimates contained in Mittleman Investment Management’s Q1 2018 investor letter.

Aimia has acknowledged receipt of the proposal:

Aimia Inc. (TSX: AIM), a data-driven marketing and loyalty analytics company, today confirms that it has received a conditional proposal from a consortium (the “Consortium”) consisting of Air Canada, The Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and VISA Canada Corporation to acquire the Aeroplan loyalty program business (the “Proposal”), and acknowledges the press release issued by the Consortium earlier today with respect to the Proposal.

This public Proposal follows prior private engagement and discussions between Aimia and the Consortium. The Board of Directors of Aimia had formed a special committee of independent directors (the “Special Committee”) some time ago in connection with such engagement and discussions and had engaged legal and financial advisors. Further to its ongoing mandate, the Special Committee will consider this Proposal in consultation with its legal and financial advisors to assess whether the Proposal is in the best interests of shareholders and the Company as a whole and will make appropriate recommendations to the Board of Directors.

Given the nature of the Proposal, shareholders of Aimia do not need to and are advised not to take any action with respect to the Proposal at this time. Aimia intends to provide updates if and when necessary in accordance with applicable securities laws.

AIM preferreds jumped on the news:

All three issues are tracked by HIMIPref™ but are relegated to the Scraps index on credit concerns.

Note that the bid is not for the company, but for the Aeroplan asset. If successful, the bid will change the balance sheet significantly – and just how good the preferreds will look at that point will be the topic of much speculation and puzzling over the balance sheet.

It will be recalled that EMA.PR.C will reset at 4.721% effective August 15.

EMA.PR.C is a FixedReset, 4.10%+265, that commenced trading 2012-6-7 after being announced 2012-5-29. The extension was announced 2018-07-06 and the reset rate was set 2018-07-16. DBRS discontinued coverage of Emera in June, 2016. The preferreds are rated P-2(low) by S&P. It is tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., EMA.PR.C and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate and the averages for investment-grade and junk issues are similar, at +1.37% and +1.20%, respectively – slightly below the market rate. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the EMA.PR.C FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of EMA.PR.C continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 5:00 p.m. (EDT) on July 31, 2018.. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.