Aeroplan
Shares in Aimia Inc. jumped 4 per cent on Monday after the parent company of the Aeroplan loyalty program confirmed its new 10-year deal with Toronto-Dominion Bank and said it's negotiating with Canadian Imperial Bank of Commerce as its current partner seeks to keep some existing customers.
However, analysts remain cautious on Aimia stock, arguing a three-way deal may be difficult to strike and the transition to a new bank will mean a short-term loss in the loyalty company's revenues.
"The transition from CIBC to TD is … likely to result in a period of pain as the CIBC business drops off and the TD business tries to ramp up amid increased competition from other banks," Industrial Alliance Securities Inc. analyst Neil Linsdell said in a note.
Aimia, which changed its name from Groupe Aeroplan Inc. last year, chose TD as its new partner after the bank offered a 15-per-cent increase in price per mile, a commitment to purchase a minimum number of miles for the first three years and put $100-million toward funding loyalty program enhancements.
CIBC had until Aug. 9 to match TD's bid and on Monday said it is challenging the terms of that offer. Meanwhile, TD, CIBC and Aimia all say they're in discussions to hammer out a deal by the end of the month that would allow CIBC to retain cards held by their banking customers. CIBC said about half of the current Aerogold card portfolio could be sold to TD.
"If an agreement is not reached, we believe there would be considerable uncertainty around the outlook for Aeroplan should a prolonged legal battle commence," noted RBC Dominion Securities analyst Drew McReynolds.
Aeroplan represents just over half of Aimia's gross billings, which are the loyalty units and other services purchased by clients such as Air Canada and TD. Revenues are recognized when the rewards are redeemed.
Analysts are also wary of the major Aeroplan overhaul that will come with the new TD deal, including the impact on revenues with the elimination of a rule whereby a cardholders' Aeroplan points expire after seven years. The result is an increase in customer redemptions, and in turn costs for Aimia, analysts say.
After announcing the changes in June, Aimia lowered its earnings guidance by $50-million for 2013 to reflect the change in the "breakage rate" – the percentage of unused miles expected to expire – to 11 per cent from 18 per cent. Aimia also took a non-cash, after-tax adjustment to its earnings of $520-million.
On Monday, Aimia said its second-quarter gross billings rose 3 per cent to $570.5-million compared with the same period last year.
It reported a loss of $415-million, or $2.43 per share, including the charges from the Aeroplan changes. That compares with a profit of $35-million, or 19 cents, a year ago. Without those charges, the company would have reported earnings of $25.2-million, or 13 cents.
Aimia shares closed up 63 cents to $15.93 on the Toronto Stock Exchange on Monday, just shy of its 52-week high. The stock reached an all-time high of around $25 in 2008, before dropping to around $6 in 2009, alongside the global economic downturn that dramatically curbed consumer spending.
While Aimia pays a decent 4.3 per cent dividend, "there are a lot of risks," said Kevin Chu, an analyst at Accountability Research Corp., citing the lower breakage rate and the drop in margins as it makes the transition to the TD partnership.
Some analysts are more positive on the stock, emphasizing Aimia's growth potential.
"You can launch, as they have, a loyalty currency in a number of different markets with very low capital intensity … that is expandable globally," said Raymond James analyst Kenric Tyghe, pointing to loyalty programs in the United Kingdom, Italy and Middle East.