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Bank of Montreal is buying LoyaltyOne Co., which runs the Air Miles loyalty rewards program, after the company filed for credit protection as a result of heavy debts and stiff competition.

Air Miles launched in Canada in 1992. BMO BMO-T is currently the company’s leading partner, and a number of its credit cards are tied to the loyalty rewards program. BMO is buying Air Miles out of creditor protection for US$160-million, plus some assumed liabilities.

The Air Miles program has hemorrhaged partners over the past few years. The company relies on strong relationships with leading retailers, which offer the loyalty program’s reward points to customers, and receive marketing data and tools from LoyaltyOne in return. Retailers have also historically liked that the program helped to create repeat customers.

The partners Air Miles has shed in the past two years include the LCBO – which sells alcohol in Ontario – Lowe’s and Staples Canada.

In June, 2022, Air Miles suffered a major blow when grocers Sobeys and Safeway, which are owned by the same company, left the program. At the time, the Sobeys relationship represented roughly 10 per cent of adjusted earnings before interest, taxes, depreciation and amortization for Loyalty Ventures Inc., LoyaltyOne’s U.S.-based parent company.

What about my points? Consumers should be wary of BMO purchase of Air Miles, observers say

Loyalty Ventures filed for creditor protection in the United States on Friday, and LoyaltyOne, its Canadian arm, did the same in Canada. In the Canadian filing Air Miles said it “operates in a competitive environment and is currently encumbered by significant funded debt imposed on it by its former U.S. parent company.”

Air Miles was owned by Bread Financial Holdings BFH-N prior to November, 2021, when Loyalty Ventures was spun off into its own entity and listed on the Nasdaq at the very peak of the pandemic stock market boom.

Air Miles attributes its recent woes to two key variables: underinvestment in its business by Bread, and a heavy debt burden imposed by Bread as part of the IPO.

Prior to the spin-off, a growing number of retailers were bringing their loyalty rewards programs in-house. Large Canadian companies doing so included Canadian Tire, which launched Triangle Rewards, and Rexall, which launched its Be Well program.

“Rather than investing in the loyalty programs business to adapt it to these emerging market trends, in Nov., 2021, Bread undertook a transaction to separate [it] into a newly created public company,” Air Miles wrote in its filing Friday.

Through the spin-off, Bread required Loyalty Ventures to borrow US$675-million and then transfer US$650-million to Bread. Bread also extracted another US$100-million of cash from Loyalty Ventures’ balance sheet.

Although Air Miles is still generating positive adjusted earnings before interest, taxes, depreciation and amortization – US$96-million in the first nine months of the 2022 fiscal year – the debt burden has hampered the company. It still owed US$656-million as of March 9, 2023.

Although BMO has reached an agreement to buy Air Miles for US$160-million, the company has launched a sale and investment solicitation process (SISP), a common practice in creditor protection filings, and a higher bid could emerge.

Despite the fact that Air Miles has been losing retail partners, the loyalty program has 473,000 clients whose miles are worth at least $1,000 each, according to the filing. Of these heavy users, 60 per cent hold Air Miles co-branded BMO credit cards. Last year the bank generated roughly half of all reward miles handed out.

BMO did not return a request for comment.

Over the past decade, Canada’s banks have invested heavily in loyalty programs, which are often tied to credit cards they issue. Rival programs to Air Miles include Royal Bank of Canada’s Avion Rewards and Toronto-Dominion Bank’s partnership with Aeroplan, which is now owned by Air Canada AC-T. In 2018, TD committed to $1-billion worth of upfront payments and future expenses to be Aeroplan’s lead financial partner.

Banks like loyalty programs because they nudge clients to spend more using credit cards, allowing the lenders to earn what is known as an interchange fee on every transaction, as well as any interest on credit card balances.

Banks also use loyalty programs as a defence against financial technology startups. Fintech companies often try to lure clients with lower prices, but banks fight back by allowing customers to earn loyalty points, which can be used on travel and a growing number of retail goods.