One of Aimia Inc.’s biggest investors has some simple advice for the frequent-flyer program: Say yes to an unsolicited takeover from a group led by Air Canada to escape an “existential crisis.”

“It behooves the board to negotiate the very best deal they can for shareholders and other parties, but at the end of the day to not consummate something here would be suicidal,” said Hanif Mamdani, who runs a hedge fund at a unit of Royal Bank of Canada.

Mamdani, the Vancouver-based head of alternative investments at Phillips, Hager & North, described the $250 million cash offer for the Aeroplan loyalty program as a “turn-key solution” to most of Aimia’s biggest problems.

Montreal-based Aimia has been in trouble since May last year when Canada’s largest airline and its biggest partner said it would withdraw from Aeroplan and start its own rewards plan in 2020. In a surprise turn of events last week, the group led by Air Canada, Visa Inc. and two Canadian banks made Aimia the offer, pledging it would also assume the liability of about $2 billion in the program’s points.

Preferred Shares

PH&N has rotated out of Aimia bonds into the company’s preferred and common shares in recent months. Mamdani said the fund has become the biggest holder of Aimia’s preferred shares, with 4.5 million of them, or about 35 per cent of the $322.5 million outstanding. The fund has been adding preferred shares since the prices dropped after the company suspended dividend payments in June last year.

So far, the bet has paid off. Mamdani said he bought the securities at prices in their “low teens.” All three of Aimia’s preferred shares traded near $19.50 on Friday, according to data compiled by Bloomberg. Mamdani still sees that as good value as there’s a high likelihood of them getting back to par, or $25, and paying the accrued dividends. That would leave their potential worth at $26.50 to $27.

Aimia’s common shares have rebounded more than 50 per cent this month to $3.50, bolstered by the Air Canada bid. The stock is still well off its 2008 peak of about $25.

Aeroplan, which was launched in 1984, was once the in-house loyalty program of Air Canada before it was spun off as a wholly-owned subsidiary in 2005. It was rebranded Aimia in 2011.

Visa Ties

Aeroplan was also linked to Canada’s most popular credit card, Canadian Imperial Bank of Commerce’s Aerogold Visa. The two-decade partnership ended in 2013 when Toronto-Dominion Bank took over as the primary financial partner. Both banks joined the Air Canada bid last week for Aeroplan.

Air Canada upped the ante on Friday, with Chief Executive Officer Calin Rovinescu saying the airline would immediately restart talks with credit-card partners to create its own loyalty program if Aimia fails to accept its offer by the Aug. 2 deadline. The offer came a week after Aimia said it planned to relaunch the program, adding more airlines to make up for the loss of Air Canada.

“For the board to roll the dice on some vague Aeroplan 2.0 plan and turn down this generous proposal that would serve all its constituents from shareholders, to customers, to creditors, to employees, would be not only incredibly irresponsible, but would border on negligence,” Mamdani said in a phone interview.

Sweeter Bid

The fact that the offer was made by a group of Aimia’s key business partners makes it hard to resist, Mamdani said, adding the management could still negotiate a better price. He was skeptical that a sweetened bid would match the $1 billion valuation set by Mittleman Brothers, Aimia’s largest holder of the common shares.

“You’ve got some deep-pocketed people involved here and you’re not talking about a lot of money, so if it doesn’t work at $250 million, maybe there’s a solution at $300 million or $325 million,” Mamdani said. “For the board of directors of a high profile Canadian enterprise like Aimia with an obligation to 5 million Canadian customers to bow to the pressures of one very optimistic shareholder is unlikely and would in my opinion be the height of poor judgment.”


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