You All Asked For It (AIM Update)

New year—new website—same rules here.

Look; I’m not a registered financial advisor and I am certainly not YOUR financial advisor. However, I feel confident in saying that if you do not know why you own a stock and cannot analyze news releases, you probably shouldn’t own that stock.

Since Thursday morning, I have received over 100 emails from people regarding Aimia Inc (AIM – Canada) asking; why the shares are down, what does the news mean, what should they do with their shares, etc. I write about stocks as a way to put my ideas on paper and gather insight from people who ask critical questions about my hypotheses and share information that they’ve gleaned from their own research.  If your question added to the conversation, I have diligently responded as I am also trying to make sense of the sale of Nectar to Sainsbury. If your question wanted me to do the work for you or make a decision for you, I answered very succinctly—though I answered all emails. I want to make it clear that going forward, “what do you think of XX?” and “what does XX mean?” and “should I buy or sell?” and “are you buying or selling” are no longer questions that I will answer. There are registered financial advisors who will answer those questions for you if you need help, along with plenty of public message boards with people discussing the news in real time. Don’t be lazy.

With that out of the way, I might as well address the sale of Nectar to Sainsbury. I’m certainly not happy with the price. In fact, I’d say that I’m pretty damn annoyed. However, in the overall scheme of the business, it is actually a rather small transaction. What was surprising to everyone was the fact that AIM had to transfer substantial net cash with the division, which more than offset the sale proceeds. Putting a brave face on the news, one could say that the program was going to effectively terminate in 2019 when Sainsbury left the program and would potentially become a use of proceeds leading up to that event—along with substantial costs to dramatically down-size the business. These costs may or may not have been more than the $80 million or so that were handed to Sainsbury, net of working capital (total net cash outlay was $174 million). Would it have cost less to put it into run-off or simply bankrupt the subsidiary? Probably—but it would likely color ongoing negotiations with future redemption partners at the core Aeroplan business. Would I have handled it differently as CEO? It’s hard to say without complete information. However, this does eliminate what must have been a huge distraction as this business melted away, with a major renewal negotiation pending.

This business was producing roughly $30 million a year in cash flow, and the overall impact of this sale will impact my net asset value estimate by a dollar or two a share—which ironically is what the shares dropped by. However, there’s still a whole ton of net value still left in this company.

As for why the shares dropped so much, I think it was the function of an unexpected cash transfer, a confusing conference call and the fear that if Aeroplan is sold to Air Canada, it will also need to happen with a net transfer of cash. It is in times like this, when I go back and update my model, take a deep breath and see if I am missing something.  After a quick review, this seems like an overreaction. There’s a whole lot of value still here and the market will figure it out eventually. I added a few more shares into the decline, but as AIM is a rather full position already, I mostly just watched it drop and shrugged my shoulders. Small cap stocks can be volatile…

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