8-K: Air T Subsidiary Contrail Aviation Support Redeems 16% Stake from CEO, Sets Future Put/Call Option

Contrail Aviation Support, a subsidiary of Air T, Inc., has agreed to redeem a 16% membership interest from its CEO, Joe Kuhn, for $4.57 million plus potential earnouts, and established a future put/call option for the remaining 5% stake.

Summary

• Air T, Inc.'s majority-owned subsidiary, Contrail Aviation Support (CAS), has entered into an agreement to redeem 16% of its membership interest from OCAS, Inc., owned by CAS's CEO, Joe Kuhn.
• The redemption is effective as of April 1, 2024, and involves the purchase of 16% of a 21% interest in CAS.
• The purchase price is $4,570,000, plus an earnout amount, with interest accruing on the principal at the 10-year Treasury bond yield plus 375 basis points, compounded monthly.
• The cash purchase price is payable via a secured, subordinated promissory note, with interest-only payments for the first 12 months, followed by amortization over three years.
• Payment obligations can be deferred if CAS's forecast indicates a potential loan default, reverting to interest-only or no payments if a default exists.
• Earnout payments are contingent on CAS's Adjusted EBITDA exceeding $7,000,000 annually through March 31, 2029, with a payment of 9.14% of the excess.
• Earnout payments are also subordinated to senior debt and can be deferred under loan default conditions, accruing interest at the note rate if deferred.
• A new Put and Call Agreement allows either CAS or the Seller to purchase or sell the remaining 5% interest starting April 1, 2026.
• The purchase price for the 5% interest is based on 9 times the average Adjusted EBITDA of CAS for the three most recent fiscal years, plus cash and minus debt, paid in quarterly installments over three years with interest at the 10-year Treasury bond yield plus 250 basis points.

Sentiment

Score: 7

Explanation: The document outlines a structured agreement with clear terms for the redemption of a stake and a future put/call option. While there are risks associated with subordination and performance-based payments, the overall tone is neutral and professional, suggesting a well-planned transaction.

Positives

• The agreement provides a clear path for the future ownership of Contrail Aviation Support.
• The earnout structure incentivizes the CEO to continue contributing to the company's success.
• The put/call option provides flexibility for both the company and the CEO regarding the remaining 5% stake.
• The interest rates on the notes are tied to the 10-year Treasury bond yield, providing a market-based benchmark.
• The payment structure includes deferral options to protect the company from loan defaults.

Negatives

• The payment obligations are subordinated to senior debt, which could delay or prevent payments to the CEO.
• The earnout payments are contingent on achieving a minimum Adjusted EBITDA of $7,000,000, which may not be guaranteed.
• The put/call option for the remaining 5% interest is not exercisable until April 1, 2026, creating a period of uncertainty.
• The valuation of the 5% interest is based on a multiple of Adjusted EBITDA, which can be subject to fluctuations and accounting adjustments.
• The potential for payment deferrals due to loan defaults could create uncertainty for the seller.

Risks

• The subordinated nature of the promissory note and earnout payments means they are subject to the financial health of CAS and its senior debt obligations.
• The earnout payments are dependent on CAS achieving a minimum Adjusted EBITDA of $7,000,000, which may not be guaranteed.
• The put/call option for the remaining 5% interest is subject to the future financial performance of CAS and market conditions.
• Changes in interest rates could affect the cost of the promissory notes.
• The potential for loan defaults could delay or prevent payments to the seller.

Future Outlook

The agreement outlines a structured approach for the potential future acquisition of the remaining 5% interest in CAS, with a put/call option exercisable from April 1, 2026, and a valuation mechanism based on the company's financial performance.

Industry Context

This transaction reflects a common practice in private equity and closely held businesses where founders or key executives may sell a portion of their stake while retaining some ownership and incentives for future performance. The use of earnouts and put/call options is a typical mechanism to align interests and manage risk in such transactions.

Comparison to Industry Standards

• The use of a multiple of Adjusted EBITDA (9x) to value the remaining 5% stake is a common valuation method in private transactions, particularly in the aviation support industry.
• The interest rates on the promissory notes, tied to the 10-year Treasury bond yield plus a spread, are consistent with market rates for subordinated debt.
• The earnout structure, based on a percentage of EBITDA above a certain threshold, is a standard approach to incentivize performance in acquisitions and buyouts.
• The subordination of the debt to senior lenders is a typical feature of private debt agreements, reflecting the higher risk associated with subordinated debt.
• The put/call option mechanism is a common way to provide a path for future ownership changes in private companies, allowing both the company and the seller to manage their positions.

Related Party Transactions

• The transaction involves a redemption of membership interest from OCAS, Inc., which is owned by the CEO of Contrail Aviation Support, Joe Kuhn.

Stakeholder Impact

• Shareholders of Air T, Inc. will be impacted by the financial obligations and potential future ownership changes at its subsidiary, Contrail Aviation Support.
• Employees of Contrail Aviation Support may be indirectly affected by the financial performance of the company and any potential changes in ownership.
• The CEO of Contrail Aviation Support, Joe Kuhn, is directly impacted by the terms of the redemption agreement and the put/call option.
• Lenders to Contrail Aviation Support are impacted by the subordination of the promissory note and earnout payments.

Next Steps

• Contrail Aviation Support will make monthly interest payments on the promissory note starting May 1, 2024.
• CAS will calculate and potentially make earnout payments annually based on its Adjusted EBITDA through March 31, 2029.
• The put/call option for the remaining 5% interest can be exercised starting April 1, 2026.
• The parties will need to monitor CAS's financial performance to determine the value of the remaining 5% interest and the potential for earnout payments.

Key Dates

Keywords

Membership Interest Redemption, Earnout Agreement, Put and Call Option, Adjusted EBITDA, Promissory Note, Subordinated Debt, Contrail Aviation Support, Air T Inc, OCAS Inc, Joe Kuhn