I believe Aimia (AIM) is simply too cheap even if the market believes it is a value trap with a potentially long-lasting sum of the parts discount. There are a number of previous write-ups on AIM so I will keep it brief.
My investment thesis summary:
Given its previous history as the Aeroplan Income Fund and subsequent value destruction, AIM potentially suffers from its previous shortcomings and also fits into few investors’ mandates as an orphan small cap name with an eclectic collection of investments.
When Air Canada refused to renew its agreement with Aimia, Mittleman brothers’ involvement and a refresh of the management team and board was welcome to prevent the fire sale of assets and to salvage the company – including ultimately selling Aeroplan back to Air Canada
Although the new management’s actions were positive (or less negative) for AIM shareholders, the new team likely realized the value of having a publicly traded investment vehicle and effectively having permanent capital (not having to worrying about redemptions). Rather quickly, AIM shares re-rated lower as the story shifted towards a permanent investment vehicle with a likely holdco discount rather than some hope of a quick(er) return of capital to shareholders story.
Despite this, AIM executed reasonably well by monetizing its PLM stake (loyalty program for AeroMexico) notwithstanding we just went through a COVID pandemic and AeroMexico itself had to restructure.
AIM proceeded to make 2 private equity acquisitions that may be perceived as not the best use of capital, exacerbated by engaging a PE partner that both have the right to acquire an interest and earn a performance fee on the deals.
I think there is a difference between not allocating capital to its highest and best use, and lighting money on fire. I have no inside knowledge to disprove these transactions were a misuse of capital but see: a) the current valuation already reflects value destruction, b) there is additional adult supervision from 19.9% shareholder Mithaq Capital and c) despite conflicting signals, we have seen AIM’s share count drop from ~150 mln to ~87 mln in the past 5 years.
Air Canada originally spun off its loyalty program in Aeroplan Income Fund to take advantage of Canada’s previously generous tax treatment of income trusts (like the MLPs in the US). With predictable and ample cashflow from Aeroplan, AIM over time acquired various business related to loyalty programs. In 2017, Air Canada surprised the market by announcing the non-renewal of its agreement with AIM and plans to launch a new loyalty program. With perhaps questionable business acumen, the existing management team proceeded to fire sale assets, being particularly concerned about deferred point liabilities on its balance sheet. Activist shareholders emerged, replacing AIM’s board and management team (although some would argue not fast enough and not negotiating with Air Canada hard enough as well), leading to Air Canada coming back to the table to purchase Aeroplan back from AIM in 2018.
Transition to Holding Company: Self-Dealing, Having a LT Investment Horizon or Both?
Perhaps recognizing the opportunity to establish a permanent investment vehicle, AIM quickly transformed into a holding company with management deploying cash into public securities and more controversially, acquired Mittleman Investment Management for ~C$20 mln. It would be nearly impossible to argue the optics and the valuation are favourable to AIM shareholders. On the other hand, AIM appears to have done a reasonable job cutting G&A expenses, generating some gains on public security investments and selling PLM for just over C$530 mln in cash. The optimistic would argue AIM is being set up for longer-term investment performance while a pessimist would believe these moves are done primarily to enrich management. Perhaps the truth is somewhere in between.
PLM Cash Proceeds Deployment
Obviously, if the PLM proceeds were immediately returned to shareholders via large buybacks or special dividend(s), AIM’s share price would be 100% higher. Although AIM clearly telegraphed that they are looking for cashflowing businesses in PE transactions, their recently announced deals do not appear to give shareholders a lot to cheer about:
EBITDA deal multiples don’t appear particularly attractive given the current macroeconomic environment
The optics of acquiring a ropes company in India would suggest better uses of AIM’s capital
The need to partner with Paladin, while giving them a right to acquire 20% in the deal and paying what appears to be a performance fee
However, as value investors, we should recognize there is a difference between what things ought to be versus, given the current situation, is AIM valued appropriately.
Embedded Expectations Very Low
With the cash proceeds from the PLM sale (just over C$500 mln), AIM’s cash balance was in excess of C$5 per share. Despite this, AIM persistently traded at < $4 per share, reflecting the market’s skepticism on AIM creating significant value with this cash and likely already applying a holdco discount to its future investments ahead of time.
Now that the PE investments have been announced, I would suggest the bottom in expectations should have been set, leaving potential upside surprises from: 1) business execution, 2) harvesting of tax losses and 3) some reasonable capital allocation going forward (buybacks)
Valuation Implies Some Cash Just Lit on Fire
While I understand the value trap and holdco discount arguments, my attempt at a sum of the parts valuation suggest the current share price matches my low case of assuming an instant 30% off the 2 recent PE deal values.
Again, there is a difference between outright value destruction (lighting cash on fire) and not investing in the highest risk adjusted opportunities available. With the 2 PE deals having growing revenues and FCF generation, it is hard to argue the transactions were negotiated so poorly to warrant an immediate 30% discount, but here we are:
For completeness sake, I included a theoretical liquidation scenario where AIM’s holdings in the low case are further discounted by 20% and prefs are redeemed at par. Shareholder should still recover almost $2.50 per share.
While one can run a truck through the numbers above, I would add that Mithaq Capital’s 20% ownership likely provides some additional adult supervision to limit the risk of any further permanent capital impairments going forward.
Why Does This Opportunity Exist?
I think this opportunity exists because:
Small cap Canadian name that does not fit into any Canadian top of mind sectors (banks, energy, mining, etc.)
Management actions could be polarizing. Even some smaller opportunistic fund managers avoid this given the history