Breach Inlet Capital Sends Letter To Board Of Aimia Inc.Business Wire
DALLAS–(BUSINESS WIRE)–Breach Inlet Capital, an investment firm focused on underfollowed and misunderstood small cap equities, delivered a letter to the Board of Directors of Aimia Inc. (TSE: AIM) today. The letter outlines Breach Inlet Capital’s concerns with Aimia’s Board, existing operating business, and recently-announced capital allocation strategy. The letter also provides recommended actions to maximize value for Aimia shareholders.
The full text of the letter follows:
April 4, 2019
Members of the Board of Directors
525 Viger Avenue West, Suite 1000
Montreal, QC H2Z 0B2
Dear Members of the Board:
Breach Inlet Capital, LP (“Breach Inlet”) owns ~1.2mm shares of Aimia Inc. (the “Company” or “AIM”). Based on its 2018 Proxy, our stake is more than eight times greater than the cumulative shares (including DSUs) held by AIM’s Board of Directors (the “Board”) excluding Philip Mittleman. We also have a history of constructively engaging boards to create shareholder value. As a recent example, we delivered a private letter to the Board on March 14th recommending AIM immediately enact a Substantial Issuer Bid (“SIB”). Two weeks later, the Board announced a SIB as a component of AIM’s new “Consolidator Strategy”1.
We remain steadfast in our belief that AIM trades for a substantial discount to the Company’s Net Asset Value (“NAV”), which we estimate is at least C$7 per share2 or ~80% higher than AIM’s current price. Despite numerous corporate developments in the past nine months, the gap between AIM’s trading price and estimated NAV is not shrinking. For example, we found it unprecedented that AIM announced plans to repurchase ~25% of its common shares, yet its share price is only up ~3%. We are increasingly convinced that AIM’s share price does not reflect NAV because shareholders are concerned about the following:
- The Board is still dominated by Directors who oversaw value-destruction.
We are encouraged by the retirements of Bob Brown and Roman Doroniuk. However, four of AIM’s seven remaining Directors have been on the Board since 2017. We believe these directors (Bill McEwan, Chris Kreidler, Emma Griffin, and Thomas Gardner, collectively “Legacy Directors”) were complicit in a strategy that destroyed enormous shareholder value. More specifically, AIM received: (1) negative net cash proceeds with the sale of a cash flow-generating business in Nectar and (2) less than 2x EBITDA for the sale of Aeroplan3. Perhaps this value-destruction should not be surprising, as the Legacy Directors do not appear aligned with shareholders. As evidence, the Legacy Directors own ZERO common shares and only ~130K DSUs worth, in the aggregate, a measly ~C$500k according to AIM’s 2018 Proxy. In other words, the Legacy Directors have invested NONE of their personal capital in the Company. Until the Board’s composition shifts further away from the Legacy Directors, investors will likely struggle to gain conviction in the Company.
- 2019 Board changes do not include any new Director nominees.
We believe the Board is not capitalizing on an opportunity to add Directors. Since the Consolidator Strategy hinges upon intelligent capital deployment, it is imperative that proven capital allocators represent shareholders. We believe investors would have cheered the addition of shareholder-friendly Directors, but the lack of nominees likely created further doubts.
- Losses from existing operating assets are rapidly increasing.
With Aeroplan divested, the Company’s primary operating asset is Insights & Loyalty Solutions (“ILS”) and its financial results are alarming. For FY18, ILS revenue fell ~15% Y/Y while its EBITDA declined another ~60% Y/Y to NEGATIVE C$35mm4. Even worse, ILS revenue dropped 30% Y/Y in 4Q185. We believe investors are rightfully concerned about the dismal results of current operations and the Board’s intent to acquire more assets in the same loyalty industry6.
- The Board does not seem to be considering the monetization of minority investments.
AIM’s two largest minority investments are Club Premier (“PLM”) and Cardlytics (“CDLX”). We believe that since AIM is unlikely to gain full control over either, AIM is also unlikely to ever receive full credit for their values. Furthermore, CDLX is not generating positive EBITDA or cash flow, so it does not meet AIM’s Consolidator Strategy criteria of owning “EBITDA-accretive and cash flow-generative businesses”7. Therefore, we think the Board should aggressively pursue the monetization of AIM’s minority investments. Yet, the Board seems to be taking the opposite approach and further entrenching AIM, especially in PLM. As evidence, AIM recently announced (1) increased representation on PLM’s Board, (2) a one-time special dividend from PLM, and (3) an increase in the ongoing dividend from PLM. On the Q418 earnings call, AIM’s CEO (Jeremy Rabe) also proclaimed, “Over the long term, we remain committed to maximizing the value of this investment.” We find this perplexing given the majority-owner, Aeroméxico, stated on its Q218 earnings call, “It is our view that the best long-term solution for all stakeholders is for Aeroméxico to acquire the equity stake currently held by Aimia.” In short, investors appear to be penalizing AIM because the Board has not provided a plan to exit its minority investments.
- M&A strategy is inherently limited due its focus on two related industries.
AIM’s Consolidator Strategy focuses capital deployment on sub-sectors within the larger loyalty and travel industries (“Loyalty & Travel”). We believe this narrow focus inherently limits AIM’s potential return on invested capital (“ROIC”). As discussed, AIM already operates a Loyalty & Travel company that is very unprofitable. Further, we believe pursuing acquisitions in the Loyalty & Travel industry is unattractive due to (1) constant disruption, (2) difficulty scaling, and (3) synergies potentially required to drive accretion. CEO Rabe alluded to these challenges on the Q418 earnings call8.
Simply put, we do not believe the recently-announced Consolidator Strategy is one that will maximize shareholder value. Given AIM’s muted share price reaction since the Consolidator Strategy announcement on March 28th, we believe investors agree with our view and have effectively rejected this plan. As such, we think the Company and Board is at a critical juncture. If the Board implements our recommendations below, then we believe AIM’s share price could appreciate above its current NAV. If not, we fear the Company could continue down its destructive path of substantial losses and unwise capital deployment.
- Replace (4) Legacy Directors with proven capital allocators.
AIM’s strategy to tailor its capital allocation efforts to the experience of its existing Board and Management is a short-sighted approach. We are optimistic that CEO Rabe can add value to AIM shareholders via his Loyalty & Travel background. But, attractive acquisitions in other industries will be “left on the table” if the Company’s capital deployment effort is limited to Loyalty & Travel. Shareholders will benefit from the addition of new Directors with demonstrable track records of allocating capital across various industries – not a prolonged tenure of the Legacy Directors. According to its 2019 Canada Policy Guidelines, Glass Lewis “believes that boards should be responsive to shareholder concerns and issues that may adversely affect shareholder value. In particular, we believe that a board response is warranted…when 20% or more of shareholders: (i) withhold votes from (or vote against) a director nominee”9. As the Board is aware, more than 30% of votes were “withheld” for the Legacy Directors at the 2018 Annual General Meeting (“AGM”)10. If Mittleman Brothers, LLC had not been obligated to vote “for” the Legacy Directors11, we believe the Legacy Directors would have likely had even more votes “withheld”. Therefore, we believe the Legacy Directors should immediately follow Brown and Doroniuk into retirement. The remaining Directors should then recruit new nominees to be put up for election by shareholders at the 2019 AGM. We suspect the remaining Directors will have success attracting talented capital allocators given AIM’s C$700mm+ of cash and C$700mm+ NOLs.
- Close the ILS segment to eliminate forecasted losses.
AIM’s goals for the ILS segment are more concerning than ILS’s results. As we understand it, AIM hopes for adjusted EBITDA to be breakeven during FY2012. However, the adjusted EBITDA calculation includes C$24 mm of distributions from PLM13. As such, basic math indicates that Management’s goal for the existing operating assets (primarily ILS) is to improve EBITDA to NEGATIVE C$24 mm in FY20. We find AIM’s logic of sustaining losses from ILS to be a complete disregard for maximizing shareholder value. Given the steep revenue declines in ILS, we view it as highly unlikely that AIM can even meet its “profitability” target for ILS. As such, we recommend the Board immediately shutter ILS despite the shut-down costs.
- Cut corporate expenses to reduce destructive cash burn.
We estimate corporate expenses to be ~C$30 mm annually consisting of: (1) ~two dozen employees, (2) technology, and (3) real estate14. If ILS is closed and AIM pivots to an investment firm, we believe the aforementioned expenses could be dramatically reduced. AIM’s NAV declines each day that its excessive corporate costs deplete its cash balance. Therefore, we recommend an immediate and aggressive reduction to corporate expenses to preserve value for shareholders.
- Initiate a formal process to monetize minority investments.
AIM is a more attractive investment without the complexity of owning CDLX shares. Meanwhile, the value of PLM is not fully reflected in today’s share price, likely due to the Board’s approach. To prove our point, we believe the remaining float of two Brazilian companies – Smiles Fidelidade SA (“Smiles”) and Multiplus SA (“Multiplus”) – will likely be acquired by their parent airlines. Shares of Multiplus were tendered at ~7x EBITDA and shares of Smiles currently trade for ~7x EBITDA15. We believe AIM’s PLM stake is worth a far higher multiple due to (1) AIM’s larger representation on PLM’s Board, (2) PLM’s advantageous banking relationship, (3) more favorable competitive dynamics for PLM, and (4) larger opportunity for PLM given Mexico’s flights per capita is lower than Brazil. In addition, PLM’s member enrollment and EBITDA keep growing. As PLM’s EBITDA rises unabated, AIM’s stake continues to become more expensive to a potential suitor. Given Aeroméxico’s desire to own PLM outright, we recommend the Board re-engage Aeroméxico with the intention of divesting AIM’s PLM stake for a healthy multiple. We also strongly encourage the Board to monetize AIM’s other minority investments.
- Do not pursue any acquisitions until after the 2019 AGM.
As described above, the lack of appreciation in AIM’s share price (despite announcing a massive SIB) would indicate investors and shareholders have little confidence in the Board’s Consolidator Strategy or the Board itself. In addition, we again remind the Board of Glass Lewis’ 2019 Canada Policy Guidelines which state: “…a board response is warranted any time 20% or more of shareholders…vote against a management-sponsored proposal”. The majority of the Board had more than 20% of its votes “withheld” at the 2018 AGM, yet this same Board subsequently approved the Consolidator Strategy. Those facts would imply that more than 20% of shareholders do not agree with the Consolidator Strategy. Therefore, we demand that the Board not pursue any acquisitions until after shareholders have formally voted at the 2019 AGM.
- Following the 2019 AGM, pursue M&A across all industries and not just within Loyalty & Travel.
After the 2019 AGM, we recommend that the Board adjust its narrowly-focused acquisition strategy to consider all industries. By doing so, the Board can review a broader spectrum of investment opportunities that should lead to acquisitions that provide the most attractive ROIC. Berkshire Hathaway (“BRK”) is the most obvious example of a publicly-traded holding company that has created enormous shareholder value by investing across many industries. Over the past three decades, BRK has generated an annualized shareholder return of ~15%. For the reasons outlined above, we do not think the Loyalty & Travel industry alone can consistently provide the best acquisition opportunities or shareholder returns.
- Use SIB to aggressively buyback shares given NAV disconnect.
Given our belief that AIM trades at a material discount to its NAV, we recommend the Board quickly utilize the full C$150mm SIB to repurchase shares. We also urge the Board to return capital to shareholders by up-sizing the SIB amount if the material disconnect between AIM’s share price and its NAV persists. We strongly believe the Board’s best and most urgent use of cash should be towards accretive and less-risky SIB transactions.
In summary, we believe that AIM’s fair value could rise above today’s NAV if the Board enacts our recommendations. We are happy to discuss our thoughts with the Board and look forward to hearing from you.
Chris Colvin, CFA
Founder and Portfolio Manager
Breach Inlet Capital, LP
1 “Consolidator Strategy” is the strategy outlined by AIM on 3/28/19 (LINK)
2 Our NAV = (cash & investments + 10x 2018 adjusted EBITDA for PLM + current market value for CDLX + announced sale proceeds for Fractal + ~C$100mm for Think Big – preferred securities – unpaid dividends – C$50mm shut-down costs) / 152mm shares
3 Aeroplan’s 2018 adjusted EBITDA of C$304mm; Source: 2018 management discussion and analysis (LINK)
4 Source: 2018 financial statements (LINK)
5 Source: 4Q18 results press release (LINK)
6 Source: 4Q18 results press release (LINK)
7 Source: 4Q18 earnings call (LINK)
8 Quotes made by CEO Rabe during the 4Q18 earnings call:
- “… the technological innovation and disruption in both travel and marketing over the last few years has left a wealth of local businesses that need to expand, startups that have stalled and smaller businesses, whose founders are ready for monetization.”
- “… suppliers of airlines and hotels usually have complicated business development processes and long sales cycles. And reaching scale can be difficult due to lack of contacts at the right level within the travel industry. We believe there will be opportunities for Aimia to help companies with commercial innovation in this space to get traction across the very geographically dispersed travel industry.”
- “The investment process for each company considered will be based on inbound approaches and systematic origination through sector analysis and mapping to identify well positioned adjusted EBITDA-accretive targets; rigorous identification of risks and the potential mitigations; and conservative identification of where value can be created through cost and revenue synergies.”
9 Source: Glass Lewis 2019 Canada Policy Guidelines (LINK)
10 Source: AIM press release (LINK)
11 The Mittleman Agreement required Mittleman Brothers, LLC to vote for incumbent directors. Source: 2018 Proxy (LINK).
12 Source: 4Q18 earnings call (LINK) and Breach Inlet call with CEO Rabe on 3/29/19
13 Breach Inlet call with CEO Rabe on 3/29/19
14 Breach Inlet estimate based on Breach Inlet call with CEO Rabe on 3/29/19.