The U.S. parent of Air Miles is considering spinning off its popular loyalty program into an income trust, a move that would follow in the footsteps of rival Aeroplan's initial public offering last year.
Dallas-based Alliance Data Systems Corp. believes Air Miles could be worth as much as $1.7-billion (U.S.) as a trust and its interest in an IPO has only intensified now that the federal government has removed the uncertainty dogging the trust sector in the fall.
"It would be a great offering. It's back on our radar screen," Ed Heffernan, chief financial officer of ADS, said in an interview last week. "We know enough right now that if our stock just languishes more, for whatever reason . . . we would have to really consider doing something different. This will be in the top one or two or three ideas."
Mr. Heffernan said five of the "big boys" in Canada -- the investment banking units of the country's major banks -- flew to Texas last summer to pitch him on the virtues of converting Air Miles into a trust. In late November, shortly after Finance Minister Ralph Goodale announced he would be cutting dividend taxes rather than meddling directly with income trusts, the bankers began calling again to explain that the climate had improved.
"I think I'm on speed dial for most of them," Mr. Heffernan said, describing the Bay Street group as his new "buddies."
He said ADS is still assessing its options, and that while the trust structure is quite attractive the company has yet to make a decision.
ADS has been in a stock market rut for the past year. The marketing services company went public on the New York Stock Exchange in 2001 and more than tripled in value to $48.52 by the end of 2004. Since then the stock has been on a slide, closing yesterday at $41.79.
Analysts say the value of Air Miles is not adequately reflected in ADS shares, and that cutting the card program loose as a trust the company could unlock as much as $1-billion in shareholder value. At the same time, there are concerns about whether the timing is right and whether an IPO would place too much of a crimp on the parent company's cash flow needs. Air Miles churned out about $100-million in operating earnings before interest, taxes, depreciation and amortization (EBITDA) in 2004.
"It's a great candidate for a trust," said Colin Gillis, an analyst with Canaccord Adams in Boston. "You just have to ensure you're not disrupting the other components of the business. I think there are some things they need to think about in terms of does it improve flexibility or reduce flexibility?"
One of the issues, according to Mr. Heffernan, is that Air Miles lacks significant brand awareness in the United States and, as a result, American investors don't appreciate how dominant a player the subsidiary is in Canada. Air Miles has partnerships with about 100 Canadian companies and its program allows cardholders to accumulate points when they buy gas, groceries, tickets and any number of other things. These points can then be used to claim rewards.
"It's amazing when I meet a Canadian because when I say 'Air Miles' the lights go on and it's a really good conversation."
Mr. Heffernan said the company recently announced a $300-million share buyback to boost its stock and said if this move -- along with solid financial results -- doesn't spark a turnaround, then other options, like the trust, will "get discussed a lot more forcefully."
He added that the company's major shareholders are split on the issue, with some pressing for the trust and others arguing for the company to be more patient. Air Miles' cash flow is growing at about a 15-per-cent clip, meaning that if ADS pursues a trust this year, it will almost certainly command a higher total valuation than the $1.6-billion to $1.7-billion quoted by Bay Street bankers in the summer.
ACE Aviation Holdings Inc. spun off 14.4 per cent of Aeroplan last June in a $287.5-million (Canadian) offering. The entire business was valued at $2-billion at the time, but has since grown nearly 30 per cent.
"People are lining up on both sides," Mr. Heffernan said of the trust issue. "We know we can do it. We know it's worth a bunch of money. We just don't want to do it for the wrong reasons."
© The Globe and Mail
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