Troubles deepened at loyalty and marketing company Aimia Inc. on Wednesday as shareholders drove the Aeroplan parent's price down 27 per cent after it said it would be suspending all dividend payments.
Three board members also resigned as part of its $70-million cost-cutting plan as Aimia continues to grapple with the fallout from Air Canada's May announcement that the carrier would cut ties with Aeroplan in 2020.
While the company had announced in May that it would pay dividends on June 30 – ranging in size from 20 cents per common share to 39.1 cents per series-three preferred share – it said Wednesday that, despite having the liquidity to make the payments, it had failed a key capital-impairment requirement in the Canada Business Corporations Act.
"It's not an issue of solvency – we passed solvency tests," chief executive David Johnston said in an interview. "We've got the cash. … It's a technical test on capital impairment, which means legally, we have to suspend the payment."
Shares fell to $1.53 on the Toronto Stock Exchange Wednesday. Investors have given Aimia a beating since since Air Canada announced that it would leave the incentive program it originally founded in 1984 and spun off in 2002, knocking the share price down nearly 80 per cent since.
The announcement comes at a time of upheaval in the company's executive ranks. Concurrent with the Air Canada announcement, Aimia confirmed that its long-time CEO, Rupert Duchesne – who had been on a leave of absence due to a medical issue, as he was being treated for chronic mercury poisoning – would retire. Last week, Aimia announced that chief financial officer Tor Lonnum would leave the company in September, citing "family reasons."
The raft of departures, including of the three board members this week, "will raise more questions than answers for not only Aimia's investors and employees, but also for existing and prospective Aeroplan partners and members," said Bank of Montreal Capital Markets analyst Tim Casey in a research note. He was among analysts who questioned why Aimia kept its dividend at the time of the original announcement.
The payment suspension includes dividends scheduled for a June 30 payout for shareholders who bought in as of June 16. The CBCA prevents a company from paying a dividend if doing so would mean the value of a company's assets becomes less than the total value of its liabilities and stated capital.
Aimia said its stated capital account is worth about $1.5-billion for both common and preferred shares – a high balance offsetting the ratio – due primarily from having previously issued common shares at much higher values than they're currently worth.
Mr. Johnston said the company passed this test in May, when it first announced the June dividends, but the subsequent collapse in share price changed the math when the calculations were re-run ahead of Aimia's board meeting earlier this week.
If the ratio of assets, liabilities and stated capital later comes back in favour of a dividend payout, it will be up to Aimia's board to decide to issue one, "depending on their view of the state of the business at the time, and the medium-term cash flow generation of the business," Mr. Johnston said.
In the first quarter of 2017, Aimia reported $332-million in cash and cash equivalents, restricted cash and short-term investments; plus $226-million of long-term investments in corporate and government bonds.
The company has touted its free cash flow as a sign of its sustainability, though analysts are concerned over how long that will last. Mr. Casey of BMO said that "we believe there continues to be significant uncertainty regarding the company's sustainable free cash flow outlook and a lack of visibility around the Air Canada contract expiry."
Royal Bank of Canada Capital Markets analyst Drew McReynolds called the dividend suspension a surprise, and said in a note he expected shares to "remain under pressure pending greater clarity around the size of the funding gap at Aeroplan."
Aeroplan accounted for 54 per cent of Aimia's $2.34-billion in gross billings in 2016. Replacing its key partner is a huge priority, the CEO said. "It's a matter of real urgency for us and the management team, because we want our members to know that they've got great options for their points after 2020."
The company has not set a deadline to ink a new deal, he continued, declining to provide many specifics on progress. "I don't want to triangulate too far into 'Who are you talking to?' But our members fly domestically, trans-border and internationally, and we're talking to a range of potential partners. … If we focus our energy there and on the fundamental performance of the business, then I think we'll see confidence return to the stock."
Aimia is also in the midst of cutting $70-million in costs by 2019 to "simplify and focus" the business. "The chairman had conversations with the board about, frankly, the board being part of that process," Mr. Johnston said.
As a result, the company announced Wednesday that directors Joanne Ferstman, Alan Rossy and Beth Horowitz had resigned. "It's a simpler and more focused board, and therefore a less costly board," the CEO said.
With files from Susan Krashinsky Robertson
Josh O’Kane