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Aeroplan cards over the year

The three-way deal for Aeroplan credit cards is marketed as an equal billing for Toronto-Dominion Bank and Canadian Imperial Bank of Commerce, but a closer look reveals the agreement is structured to make TD the winner in the long run.

The two banks are splitting the Aeroplan accounts – CIBC keeps clients with whom they have a banking relationship, TD takes the rest – and both banks will be Aeroplan card providers for the next 10 years. But the deal is structured in such a way that will help TD build its Aeroplan profile much faster than that of CIBC.

Though the rivals will start with about the same value of Aeroplan accounts on Jan. 1, TD will be the only bank capable of mass-marketing its name with Aeroplan. CIBC, in contrast, can only widely promote the Aeroplan card option within its own bank channels. That means any major newspaper or TV ad for Aeroplan in the coming years will be tied to TD's name or logo.

TD didn't get this right for free. The bank agreed to spend $140-million with Aimia over the next few years to market its Aeroplan options. (There will be five cards, each tailored to a different income level or type of borrower.) TD is betting that such an outlay will be small compared to the number of new accounts it will bring in.

The agreement also gives TD a running start. "Instead of having to go out and win every single customer, you start off with over half a million customers," TD chief executive officer Ed Clark said in an interview. Again, though, TD has to pay for this luxury. The bank will jointly shell out $200-million with Aimia to CIBC upfront, as well as $37.5-million over the next few years. (Aimia is happy to pay CIBC for a smooth transition because the other option is a free-for-all for Aeropan cardholders, and Aimia has no guarantee that other non-Aeroplan-partner banks won't succeed in stealing clients.)

Because of these arrangements, TD is confident about its Aeroplan outlook. "I think you'd be hard pressed to find very many M&A deals that come close to this deal," Mr. Clark said. TD expects to earn about $160-million a year from the Aeroplan portfolio starting in 2015 -- next year's bottom line will be hurt by marketing costs and the like -- and if you assume these profits for many years, the bank will bring in many multiples of what it will pay in the near future.

But CIBC is not disappointed by the outcome, as CEO Gerry McCaughey noted on a conference call Monday. The bank had every opportunity to match or beat TD's offer, and it chose not to. Instead, CIBC will launch its own credit card that will let cardholders redeem their flight points on any airline. That's likely why CIBC isn't too worried about not being able to mass-market Aeroplan; it has plans to do this for its own card.

Plus, the $460-million in capital that CIBC will free up from selling half of its Aeroplan portfolio can be put toward share buybacks and any potential wealth management acquisitions.

(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)

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