DBRS Confirms Groupe Aeroplan’s Secured Debt at BBB with a Stable Trend

DBRS has today confirmed the Senior Secured Debt and the Issuer Rating of Groupe Aeroplan Inc. (Aeroplan or the Company) at BBB with Stable trends.

The rating action follows Aeroplan’s announcement that it has entered into an agreement with Carlson Companies Inc. to purchase Carlson Marketing, a privately owned, U.S.-based loyalty marketing service provider, for a net purchase price of $188 million (including transaction costs and subject to certain working capital adjustments). In addition, Aeroplan expects to incur one-time costs of approximately $16 million, primarily related to the migration of technology infrastructure in the United States from Carlson Companies Inc.’s systems. The acquisition is subject to customary closing conditions and standard anti-trust approvals in the United States and Canada. The transaction is expected to close by early December 2009 and will be financed with cash on hand (approximately $123 million) and bank facilities (approximately $65 million). Aeroplan had cash equivalents and short-term investments of $624 million and gross debt of $690 million at June 30, 2009.

Carlson Marketing is a leading firm specializing in loyalty marketing services and event engagement and management. It has major clients in such sectors as financial services, automotive, consumer packaged goods and pharmaceuticals. In terms of geography, Carlson Marketing has a presence in North America, Europe, Asia-Pacific and the Middle East.

DBRS’s rating of Aeroplan has traditionally reflected the Company’s leading market position in the Canadian loyalty marketing industry. Aeroplan’s market position and its strong relationships with key commercial partners have contributed to healthy margins, stable profitability and strong free cash flow generation. DBRS has also understood that Aeroplan would balance its growth ambitions with prudent financial management (i.e., maintain a gross debt-to-adjusted EBITDA in the 2.5 times (x) to 3.0x range). Gross debt-to-latest 12 months (LTM) adjusted EBITDA was 2.3x at June 30, 2009.

The acquisition of Carlson Marketing will provide Aeroplan with immediate geographic diversification and accelerate the Company’s international expansion strategy. DBRS estimates that Carlson Marketing will contribute EBITDA of approximately $40 million in 2010 and generate positive free cash flow. As such, DBRS now forecasts that Aeroplan will deliver adjusted EBITDA of $315 million to $340 million in 2010. DBRS also estimates gross debt-to-adjusted EBITDA pro forma the Carlson Marketing acquisition would remain below 2.5x. In addition, Aeroplan should continue to generate free cash flow after dividends of $150 million to $175 million per year over the next couple of years since operating cash flow should continue to track adjusted EBITDA and capex and dividends should remain steady.

If Aeroplan were to be challenged to maintain its financial profile within the specified range due to weaker-than-expected operating performance or more-aggressive-than-expected financial management, the Company’s current rating would likely come under pressure. On the other hand, Aeroplan’s rating could benefit from enhanced profitability and diversification achieved through growth that is financed within the Company’s stated guidelines.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Consumer Products and Rating Merchandisers, which can be found on our website under Methodologies.

This is a Corporate rating.