AIMIA BID PUTS PREFERRED SHARES UP IN THE AIR.

Holders have limited power in any deal

The lot of a preferred shareholder is not necessarily a happy one, in large part because of the limited power the security enjoys in any takeover.

The latest example to play out is the hostile plan by a consortium led by Air Canada, TD Bank, CIBC and Visa to acquire Aeroplan from Aimia Inc. Earlier we saw how preferred holders of Rona enjoyed a less than pleasant experience when U.S. giant Lowe’s came knocking in early 2016.

In the most recent situation, because the consortium only wants to purchase a business line from Aimia — and not the company — there is no offer for Aimia’s common shares and its preferred shares.

Accordingly, because of the way the deal has been structured, holders of Aimia’s securities will be forced to play a waiting game to see whether Aimia responds to Air Canada’s demand for a response by Aug. 2.

Even if that deadline is missed, a transaction seems inevitable because Air Canada, TD and CIBC have lots of reasons to be acquirers. (Air Canada used to own it while the two banks are “providers” to the program and would be hurt if changes were made that further weakened the program.)

As with all deals, price will be a sticking point and Aimia will want full value because a new group of shareholders (and subsequently directors) launched a proxy fight before this year’s annual meeting.

If and when a deal is structured, Aimia will have an expanded pile of cash (at least $250 million but less ongoing revenue) and no ownership of the $2 billion of Aeroplan points liability that has been built up.

“How the sale of that asset, if successful, is allocated to Aimia’s balance sheet is up to Aimia,” noted one analyst.

“In the event they decide to wind things down, or pay down debt, the preferred shares would come next.”

Aimia has two classes of rate reset preferred shares: in January 2010 it raised $172.5 million at a coupon of 6.50 per cent and in January 2014 followed up with a $150-million raise at 6.25 per cent. In both cases, holders paid $25 a share.

In normal circumstances, the holders would have been receiving regular dividends. But because of the events of May 2017, when Aimia told the world that “Air Canada does not currently intend to renew its partnership with Aeroplan on its expiry in June 2020,” matters are not normal. Dividends have been suspended on both common and preferred shares.

The prices of the two fixed-rate preferreds have jumped since the consortium made its announcement — though they are not back to the $25 level. In the case of Aimia’s Class C prefs, the closing price Monday ($19.25) was back to levels of late 2015.

In the case of preferred shares issued by Rona, the lot was to be offered $20 a share, when that company inked a $3.2-billion offer with U.S. based Lowe’s in March 2016. About five years earlier investors anted up $25 to buy 6.9 million preferred shares and the right to receive an annual coupon of 5.25 per cent.

But in that takeover, a negotiated transaction, the pref shareholders were offered $20 a share, an offer that was backed by a fairness opinion from Scotia Capital that deemed the transaction “fair from a financial point of view.”

Holders had a different view: by a three-to-one margin they voted down the offer and the pref shares remained outstanding until October when Lowe’s offered a more reasonable $24 a share. At the meeting, 95 per cent of the holders gave their support.

Fidelity Investments led the charge to obtain fair value for the holders, a move that also meant Lowe’s wasn’t required to file financial statements. The move by the Air Canada consortium increases the likelihood that, in time, Aimia may experience a similar fate.