Air Canada group offers $2.2B for Aeroplan

TORONTO • Air Canada and a pair of large Canadian banks surprised the market Wednesday with a hostile $2.25 billion bid for Aimia Inc.’s Aeroplan rewards program.

The bid also created a buzz on Bay Street because it comes a little more than a year after the airline announced plans to allow its arrangement with Aimia to expire and launch its own in-house loyalty program, set to begin in 2020.

“The optics of what has transpired between Air Canada and Aimia over the past 16 months are sure to raise some eyebrows,” said Doug Taylor, managing director of technology and aerospaceequity research at Canaccord Genuity in Toronto.

“However, the short response from Aimia today does suggest Air Canada has approached Aimia in good faith privately in an effort to reach a resolution before making a hostile offer.”

Aimia’s statement said the marketing and loyalty company had created a special committee of independent directors “some time ago” during those discussions, and had engaged legal and financial advisers, who would assess whether the current proposal is in the best interests of shareholders and the company.

The bidding consortium

includes Canadian Imperial Bank of Commerce and Toronto-Dominion Bank,

which offer credit cards associated with the Aeroplan loyalty program, and Visa

Canada Corp. The bid is comprised of $250 million in cash plus the assumption of $2 billion in Aeroplan points liability.

The cash component is equivalent to $1.64 per Aimia share and the consortium said its proposal implies a value of approximately $3.64 per share, representing a 46-per-cent premium to Aimia’s share price close on July 24.

Aimia shares were trading above $8 before Air Canada’s May 11, 2017 announcement that it would let its commercial arrangement with Aimia expire and launch is own loyalty program in 2020.

The bid unveiled Wednesday raised eyebrows because it takes Air Canada in a different direction.

According to a news release, the consortium, if successful, plans “a smooth transition of Aeroplan members’ points to Air Canada’s new loyalty program.”

Two sources who specialize in mergers and acquisitions said there appears to be little to challenge from a legal or business practices perspective. Air Canada was entitled to let its arrangement with Aimia expire, said one, while the other noted that the consortium is putting a value on the loyalty business, rather than trying to buy the company’s underlying shares.

“It might be quite different if Air Canada was bidding for Aimia,” said John Levin, a partner at Fasken Martineau DuMoulin LLP in Toronto.

Financial analysts suggested a successful purchase of the loyalty business by the consortium would be positive for the airline, the banks, which would protect credit card market share, and Aeroplan loyalty customers, who would not have to deal with a potentially messy transition and the possible re-valuing of earned rewards.

“For the banks, we believe the primary motivation … is defensive in nature,” Gabriel Dechaine, an analyst at National Bank Financial wrote in a note to clients, in which he pointed out that credit cards are “one of the highest return businesses the banks have.”

A successful bid with Air Canada for the loyalty business would save the banks from “annoying” their customers with another transition as rewards were reconstituted under a new structure, a scenario that could leave them vulnerable to losing clients to competing credit cards.

Dechaine described the Aeroplan portfolio as “high quality” and estimated the combined profitability generated for the two banks at “well in excess of $400 million.”

Ben Cerniavsky, an analyst at Raymond James, said there is some ambiguity in Air Canada’s latest move and the net financial implications remain unclear. However, he deemed the bid “shrewd,” noting that it removes the spectre of potentially costly competition.

“We see the acquisition of Aimia as a shrewd (albeit still costly) means of avoiding the inevitable war of attrition that we foresaw in the future as the two parties were destined to battle fiercely for loyalty members once the current arrangement finally ended,” the analyst wrote in a note to clients.

The consortium’s bid for Aimia is set to expire Aug. 2.