Air Canada parent ACE Aviation sold a 12.5 percent stake in its Aeroplan loyalty points business on Wednesday in the airline industry's first spinoff of a frequent flyer program.
Underwriters agreed to take up 25 million units of Aeroplan Income Fund at CAD$10 a unit, raising CAD$250 million (USD$203 million).
The spinoff values the loyalty program at about CAD$2 billion.
"We are extremely pleased to see the market valuing Aeroplan at CAD$2 billion, making it one of Canada's largest business trusts and the first-ever monetization of an airline frequent flyer program," ACE Aviation Chief Executive Robert Milton said in a statement.
Jacques Kavafian, analyst at Research Capital, said the price of the new Aeroplan units was in line with expectations. The market is valuing Aeroplan at a higher multiple of earnings as a separate entity than it does as part of ACE Aviation, he said.
"I think the value of Aeroplan is not reflected in Air Canada's share price," Kavafian said.
Like Air Canada, Aeroplan has a dominant position in the Canadian market.
Aeroplan has about 5 million members in a country of 33 million and tie-ins with more than 60 commercial partners, including Canadian Imperial Bank of Commerce and American Express.
Airline consultant Robert Mann said struggling US airlines probably are watching the Aeroplan spinoff and considering a similar move.
"You could presume that every one of the major carriers has a price tag on it," Mann said. "I think they will all do it. It's a question of when do they need the money."
"You start to put a value on everything when you're forced to," he added. "So far, it hasn't gotten to the point of separating the unit and making public offerings."
In the Aeroplan spinoff, underwriters have an option to buy up to 3.75 million additional units at the offer price for 30 days after the closing to cover over-allotments.
Aeroplan Income Fund will own 12.5 percent of Aeroplan Limited Partnership, and that could swell to 14.4 percent on the overallotment option, ACE Aviation said.
After the offering, ACE Aviation will own 87.5 percent of Aeroplan LP, or 85.6 percent if all of the overallotment is used.
Aeroplan LP will keep about CAD$100 million of the net proceeds of the offering, in part to fund a reserve for Aeroplan Mile redemptions.
The rest, CAD$125 million, or CAD$160 million if the overallotment option is exercised in full, goes to ACE Aviation.
Royal Bank of Canada agreed to provide Aeroplan LP with CAD$475 million of credit, of which about CAD$300 million will be used to fund the balance of the reserve for frequent flyer points redemptions.
Canadian income funds or trusts do not pay corporate tax, but distribute cash flow to investors, who are taxed on the payouts they receive. Trusts have become popular with investors seeking higher yields, and that has spurred the conversion of a range of companies.
