Aimia Rejects Bid by Air Canada, TD, CIBC and Visa Canada Consortium for Aeroplan Program

TORONTO–Air Canada, The Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, and Visa Canada Corporation announced that Aimia Inc. has rejected their proposal to acquire its Aeroplan loyalty business disclosed on July 25, 2018. The parties had set a deadline of August 2, 2018 for Aimia to accept the proposal.

Air Canada, TD, CIBC and Visa enhanced the offer and engaged in extensive discussions with Aimia over the past several days to attempt to reach an economically viable agreement.

The proposal would have ensured value and continuity for Aeroplan members as well as customers of Air Canada, TD, CIBC and Visa. As previously communicated, it would have also allowed Aeroplan Miles to transfer into Air Canada’s new loyalty program in 2020, providing convenience and value for millions of Canadians.

The July 25 proposal was for a total consideration of $2.25 billion, including $250 million in cash and the assumption of approximately $2 billion of Aeroplan points liability. The proposal implied 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 the spot closing price as of July 24, 2018. The market equivalent value was 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.*

Solid progress being made on post 2020 program transformation and cost reduction initiatives

MONTREAL–Data-driven marketing and loyalty analytics company Aimia Inc. reported its financial results for the quarter ended June 30, 2018. Recently-appointed Chief Executive Officer, Jeremy Rabe, commented: “The value Aeroplan already delivers to our 5 million engaged members is unmatched in the Canadian travel loyalty rewards industry. In the quarter, existing members continued to accumulate and re-engage post redemption at similar rates to the same quarter last year and spend on Aeroplan credit cards remained strong.

“We have a clear plan to leverage our strong assets and unparalleled purchasing power into a growing and competitive travel market post 2020 to secure a compelling rewards offering at a manageable cost, offering our members increased flexibility, leading value and an improved member experience.

“In the meantime, we are also making solid progress on streamlining our own business as our improving margin trajectory demonstrates.

“There is an opportunity to move faster to transform Aeroplan into the best travel loyalty program in Canada and that is the path we are on.”

Strategic highlights include:

Key priorities outlined and key pillars of future Aeroplan program communicated to members in late July

Unique purchasing strategy being implemented to shape key commercial partnerships and to differentiate Aeroplan flight rewards offering post 2020 and active discussions underway

Recent proposals for Aeroplan and PLM highlight the strength, quality and desirability of Aeroplan and other Aimia assets and investments

Q2 highlights – GAAP basis:

Consolidated Total Revenue up by 3.9% to $375.4 million
Net earnings at $11.1 million, up by $36.2 million
Cash from operating activities at $27.4 million
Q2 highlights – Continuing operations, with variances on a like-for-like basis:(1)(2)

Coalitions Gross Billings down 3.1% to $326.3 million; Consolidated Gross Billings down 4.5% to $366.8 million on a like-for-like basis
Adjusted EBITDA margin (excluding restructuring expense) up 180 bps; Adjusted EBITDA at $46.2 million
$20.0 million of Free Cash Flow generated in the quarter

Progress on Aeroplan strategy and member offering

In addition to its continued focus on establishing the right cost base and balance sheet flexibility, Aimia will also focus on maximizing the value of its existing assets through continued execution on its Aeroplan strategy and a keen focus on returns from other investments.

The future Aeroplan program communicated to members in late July will be focused on three key pillars: offering increased flexibility, delivering leading value and improving the member experience.

Flight rewards will continue to be a core differentiator for Aeroplan. Underpinning the value promise the company has made to members is a unique purchasing strategy. The company’s approach to purchasing is expected to shape key commercial partnerships and lead to a differentiated Aeroplan flight reward offering post 2020. Leveraging its significant volume, robust member history and predictive analytics, Aeroplan plans to use bulk and block purchasing, stand-alone charters on key routes and preferred airline partnerships to allow it to secure discounts of between 5% and 40% to keep costs low. With the ability to purchase seats on any IATA-accredited airline, Aeroplan will also have the potential to purchase the cheapest available fares enabling it to offer market fare flight rewards to the same destinations for fewer miles. Aeroplan is already working actively on securing preferred airline relationships and has today announced a relationship with Porter Airlines.

Unsolicited conditional proposal to acquire the Aeroplan business

On July 25, 2018, the Corporation received an unsolicited conditional proposal from a consortium of current partners consisting of Air Canada, The Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and VISA Canada Corporation (the “Current Partner Consortium”) to acquire the Aeroplan loyalty program business.

Aimia’s August 2, 2018, update on discussions with Current Partners noted that it has engaged in constructive discussions regarding their conditional acquisition of the Aeroplan business. Aimia noted that the original cash consideration was $250 million and was updated to $325 million, neither of which reflected the value of the Aeroplan business to members and stakeholders. Aimia has been in active dialogue with our Current Partner Consortium and Aimia’s current proposal removed the highly conditional nature, onerous terms and conditions as well as exclusions from previous offers, which could create near term uncertainty for members. Aimia’s current proposal is $450 million, including revised terms that remove all uncertainty from discussions with the Current Partner Consortium.

Aimia expects all companies in the Current Partner Consortium to honour their long standing contractual commitments.

Operational performance

Coalitions Gross Billings decline of 3.1%

Consolidated Gross Billings were down $29.2 million to $366.8 million in the quarter, with $11.8 million of the decline attributable to disposals of non-core assets. Excluding this impact, Consolidated Gross Billings on a like-for-like basis, were down 4.5%.

Coalitions Gross Billings were down 3.1% at $326.3 million. Despite a strong conversion campaign from a financial card partner and higher credit cardholder spend per card, a lower number of active credit cards and less promotional activity along with the absence of a non-air conversion campaign and lost retail partner, drove an overall decline of 3.5% for Loyalty Units Gross Billings. Loyalty Services Gross Billings were up by 5.3%.
Insights and Loyalty Solutions Gross Billings were down 14.9% to $40.7 million. Gross Billings from Loyalty Units were down 19.1% due to revised pricing terms in the Air Miles Middle East program. Loyalty Services billings were below last year due to pricing shifts and client losses. Platforms saw higher recurring billings despite lower volume of set up fees compared to last year.
Improved Aeroplan contribution and lower operating expenses globally

Adjusted EBITDA was $46.2 million or 12.6% of Gross Billings, compared to $29.5 million or 7.4% in the prior year. Excluding the impact of business disposals, which included the impact of the onerous contract provision, Adjusted EBITDA decreased by $0.8 million or 1.7% on a constant currency basis. On a like-for-like basis and excluding severance, Adjusted EBITDA was $56.3 million, compared to $52.1 million in the prior year period. An improved contribution from the Aeroplan Program and lower operating expenses globally offset a reduced contribution from ILS and lower distributions from equity-accounted investments.
Operating expenses were down $23.3 million to $117.5 million, reflecting the $29.3 million impact related to business disposals, including the $20.3 million onerous contract provision recorded during the second quarter of 2017, offset by $11.8 million increase in share-based compensation expense, an impairment charge of $8.0 million recorded in the current period related to the International ISS business and a $5 million increase in severance expense. Excluding these items, Operating expenses were down $18.8 million, due mainly to operational efficiencies and timing of marketing spend.

Total headcount at June 30, 2018, was down to 1,625, from 2,250 at June 30, 2017.

Free Cash Flow generation at $20.0 million to contribute to further debt paydown

Cash from operating activities was $27.4 million, a decrease of $39.5 million partly explained by a $23.3 million related to discontinued operations. The $16.2 million decrease in continuing operations mainly reflects lower billings, higher redemption expense, higher severance and unfavourable changes in net operating assets, offset by operating expense reductions and lower net interest paid.

Higher availability and capacity on certain airlines was a significant driver of increased Aeroplan redemptions, driving redemption expense higher against the same quarter last year, which included the period prior to the Air Canada non-renewal announcement.
Free Cash Flow was $20.0 million. Capital expenditures from continuing operations were down $3.6 million to $7.4 million. Free Cash Flow per Common Share from continuing operations was $0.13.
Preserving balance sheet flexibility

Cash and investments in bonds at June 30, 2018, was $530.9 million. Total debt levels (including drawn letters of credit) of $338.4 million at June 30, 2018, are expected to decrease to approximately $328.4 million during the third quarter, with $10 million of the cash generated in the second quarter expected to be used to reduce the drawn amount on the company’s credit facility.

Strong performance from investments

The company’s investment in loyalty program Club Premier continued to generate a meaningful distribution at $4.4 million (2017: $4.6 million), reflecting a solid underlying business and a growing member base. In the second quarter, Gross Billings were up 20% to US$63.7 million, while Adjusted EBITDA was up 19% to US$22.7 million. Total members were up 0.6 million to 5.7 million at June 30, 2018. On July 26, 2018, Aimia rejected a non-binding offer from Grupo Aeromexico S.A.B. de C.V for its 48.855% stake in PLM Premier S.A.P.I de C.V.
The company’s stake in Cardlytics, a publicly-listed purchase intelligence company, was valued at $85.5 million at June 30, 2018, reflecting a $27.5 million gain in the quarter.
Return on Invested Capital(3)

For the 12 months ended June 30, 2018, ROIC was 7.7%, compared to 4.8% for the 12 months ended June 30, 2017. An increase in adjusted operating income after taxes and a decrease in Invested Capital both contributed to the increase in ROIC.

2018 Guidance

The company’s guidance for the year ending December 31, 2018, provided in February 2018, remains unchanged:

Coalitions Gross Billings: around $1.3 billion
Coalitions Adjusted EBITDA margin: around 18%
Coalitions Free Cash Flow (on a pre-tax basis): between $155 million and $175 million
Consolidated Free Cash Flow before Dividends Paid (on a pre-tax basis): between $120 million and $145 million
The above guidance is based on current expectations around redemption expense at Aeroplan and is on an IFRS 15 basis.

The guidance excludes the impact of taxes and restructuring and costs that may be incurred as a result of the Consortium Proposal issued on July 25, 2018. Further to the utilization of prior tax loss carry forwards, the company expects to pay cash taxes in 2018. Cash taxes could be in a range of between $15 million and $20 million based on current expectations around profitability, mainly against profit generated in the Coalitions business. Restructuring expenses and payments, which are now expected to total between $20 and $25 million, are also excluded from the guidance.

Dividends

Based on restrictions currently in place under the Canada Business Corporations Act and the company’s credit facility agreement, as amended, the company believes that it will not be in a position to declare or pay dividends in 2018. However, it will continue to assess its ability to declare and pay dividends on its outstanding preferred shares on a quarterly basis.

This quarterly earnings release was reviewed by Aimia’s Audit Committee and was approved by the company’s Board of Directors, on the Audit Committee’s recommendation, prior to its release.

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