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Broadcasters Have Call Option for Stake in NextRadio App

Arrangement dates to the industry’s Sprint initiative

The first of two periods for the U.S. radio industry to exercise a call option to invest in the NextRadio and TagStation businesses in the United States is coming up, according to government filings by Emmis Communications.

The call option means Emmis could be obliged to sell some or even all of the ownership of its business, though it’s unknown whether any company intends to pursue the option.

The NextRadio hybrid radio app allows users with radio-enabled Android phones to tune in local FM stations. It was developed by TagStation LLC, owned by Emmis. TagStation is a cloud-based software platform that allows stations to manage album art, metadata and enhanced advertising on various devices.

The call option is an agreement that gives an investor the right, but not the obligation, to buy a stock or bond at a specified price within a given time period. Emmis issued it as part of an agreement with other radio broadcasters in 2013.

At the time, in an effort to kick start NextRadio’s foothold in the marketplace, a consortium that included Emmis, iHeartMedia, Beasley, CBS Radio, Radio One, Hubbard Radio, Townsquare Media, Bonneville Entercom Communications and others, agreed to pay Sprint $15 million per year over a three-year period in return for the wireless provider activating the FM tuners in a minimum of 30 million FM-enabled wireless devices.

A subset of the broadcasters that contributed to the Sprint payments signed funding agreements and have the right to participate in the call option, according to Emmis. That subset of broadcasters has not been disclosed publicly.

The call option can be exercised by eligible radio broadcasters in August 2017 or August 2019, according to paperwork filed with the U.S Securities Exchange Commission. No radio operator, other than Emmis, will be allowed to own more than 30% of the NextRadio and TagStation businesses.

An Emmis spokesperson replied in writing to a Radio World inquiry about this option arrangement: “A core group of broadcasters who were early supporters of the TagStation/NextRadio initiative agreed to make payments, but wanted to make sure that TagStation/NextRadio would be operated for the benefit of the entire U.S. radio industry. As a result, we agreed to certain operating restrictions for TagStation/NextRadio (e.g., all local stations in a market would be accessible through NextRadio) and granted an option to allow the U.S. radio broadcasting industry to buy TagStation/NextRadio in August 2017 or in August 2019 as outlined in our 10-Qs and other SEC filings for the last several years.”

Radio broadcasters can exercise the option by “paying Emmis a purchase price equal to the greater of (i) the appraised fair market value of the NextRadio and TagStation businesses, or (ii) two times Emmis’ cumulative investments in the development of the businesses through August 2015,” according to the Emmis 10Q filing for the quarter ending May 31, 2017.

“Emmis would have the right to participate in the exercise of the call option and retain a stake in TagStation/NextRadio. The exact amount of that stake is currently indeterminable and would depend on the group that might be part of the exercise of the call option,” according to the spokesperson. Emmis did not indicate whether it was aware of interest from other companies.

Emmis announced last week it plans to launch streaming-compatible versions of the app for Android and Apple devices in the next few weeks. It says it continues to work aggressively to increase the number of smartphones and other wireless devices that contain the enabled FM tuner. The Sprint agreement ended last year, according to Emmis, though not before the group of radio broadcasters ran into difficulties making the required quarterly payments.

According to the most recent Emmis SEC filing last week: “Effective Dec. 8, 2016, NextRadio LLC and Sprint entered into an amendment of their original agreement. The amendment called for NextRadio LLC to make installment payments totaling $6.0 million through March 15, 2017, which have been paid. In exchange, Sprint agreed to forgive the remaining $5.8 million that it was due under the original agreement, and in return receive a higher share of certain revenue generated by the NextRadio application. NextRadio LLC received a loan of $4.0 million for the sole purpose of fulfilling the payment obligations to Sprint under the amendment.”

In all it appears Sprint was paid $39.2 million total for the app activations. NextRadio President Paul Brenner told Radio World previously that the company is no longer paying any cell carriers to activate the chip in smartphones, instead adopting a revenue sharing formula with wireless providers.

Emmis’ efforts to monetize the hybrid radio app have yet to be realized, according to the latest Emmis SEC paperwork, which indicted that through May 31, 2017, the NextRadio application had not generated a material amount of revenue.