Air Canada, banks seek to buy Aeroplan business

Shares of Montreal-based Aimia Inc. soared after the Air Canada-led consortium — including Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce (CIBC) and Visa Canada — proposed to buy Aeroplan in a deal valued at $2.25 billion, including points liabilities they would assume.

The group said the offer would expire Aug. 2 but such deadlines are often amended.

The consortium said the proposed transaction would provide continuity for Aeroplan members as well as customers of the four companies — which all have long-standing relationships with Aimia — behind the bid.

“If completed, the proposed transaction would result in a positive outcome for Aimia shareholders and Aeroplan members, allowing for a smooth transition of Aeroplan members’ points to Air Canada’s new loyalty program launching in 2020, safeguarding their points and providing convenience and value for millions of Canadians,” the group said in a statement on Wednesday.

It wasn’t immediately clear whether Aimia’s board would recommend the offer, which the consortium said was worth the equivalent of $3.64 per share.

Aimia stock rose as much 44% to $3.60 in late morning trading on the Toronto Stock Exchange after the consortium’s announcement. Shares had slipped to $3.50 by 2 p.m.

Aimia confirmed Wednesday that it received the consortium’s conditional proposal, noting that it followed prior private engagement and discussions between the parties.

The loyalty company’s board of directors formed a special committee of independent directors “some time ago in connection with such engagement and discussions and had engaged legal and financial advisors,” Aimia said in a statement.

“The special committee will consider this proposal in consultation with its legal and financial advisors to assess whether the proposal is in the best interests of shareholders and the company as a whole and will make appropriate recommendations to the board,” Aimia said.

Under the proposal, a corporation to be formed by the consortium would acquire Aimia’s loyalty business, including roughly $2 billion worth of Aeroplan points obligations as of March 31, 2018, for $250 million in cash. The total purchase price, in turn, is valued at approximately $2.25 billion.

The future of Aeroplan, which has more than five million members, has been in doubt since Air Canada announced in May 2017 that it planned to launch its own loyalty rewards plan in 2020. Aimia’s 30-year-partnership with Air Canada is due to expire in July 2020.

Over the past 14 months, Aimia’s stock had fallen to $2.50 as of the close on Tuesday, down from $8.84 prior to Air Canada’s departure announcement.

Shares got a boost earlier this month, however, when Aimia announced plans to get into the airline business itself by offering charter flights to its most popular destinations. It said on July 19 that it was in discussions with potential airline partners to operate narrowbody aircraft ideally suited for flights to sun destinations in the Caribbean.

The consortium’s proposed acquisition of Aimia on Wednesday surprised analysts, given Air Canada’s plans for its own platform.

“Air Canada’s offer may be difficult to accept for Aimia’s management given that Air Canada had abruptly decided not to renew its contract with Aeroplan last year causing havoc in Aimia’s share price,” said Martin Landry, an analyst with GMP Securities.

Given the magnitude of the transaction, it will likely require a vote from Aimia shareholders, he said in a note to clients.

“We believe they will be tempted to accept Air Canada’s offer despite the sour taste it may leave with some shareholders,” Landry said.

For Air Canada, the transaction “potentially removes the customer relations headache of orphaned Aeroplan members and potential negative goodwill,” Canaccord Genuity analyst Doug Taylor said in a note to clients.

The “smooth transition” for Aeroplan members to the new program would also ensure significant initial uptake for Air Canada’s own program when it begins in mid-2020, Taylor adds.

“While it is tough to handicap the financial impact of the values being discussed, having the much larger and well-funded financial services partners coming along with the deal certainly helps spread the assumed liability around,” Taylor said. “Additionally, Air Canada will likely have more control on how the liability is serviced vs. the prior agreement with Aimia.”

Developing a loyalty program as sophisticated as Aeroplan is a challenge, and the consortium’s move to buy it instead is not surprising, said Louis Hebert, a professor at the department of management at HEC Montreal.

“It seems that Air Canada came to the conclusion that it was simpler to buy it and enjoy a program that works well and has a good reputation,” he said.

Air Canada created Aeroplan as in-house loyalty program but it was spun off as an independent business as part of a court-supervised restructuring of Canada’s largest airline. At the time, Toronto-based CIBC was Aeroplan’s main bank partner.

Since 2014, Toronto-based TD has been Aeroplan’s main Visa card partner although CIBC continues to offer Aeroplan cards rewards points that can be redeemed for Air Canada flights and other merchandise.

Visa Canada did not respond to a request for comment. TD and CIBC declined to comment.

For the banks, the primary motivation behind this bid is “defensive in nature,” said Gabriel Dechaine, an analyst with National Bank.

“Credit cards are one of the highest return businesses the banks have, and the Aeroplan portfolio is a high quality one,” he said in a note. “We estimate it generates combined profitability well in excess of $400 million for the two banks.”

The banks likely wanted to avoid “annoying their customers” with another transition to a different loyalty program, which “could have made them vulnerable to being picked off by competitors,” he added.