A star
is born…watch out Gloria, Tonsils and the like.

Imagine the
scene. It’s in the Martin Place HQ of Macquarie Bank. A darkened room, on the
table is a tape recorder. An executive enters the room, turns on a lamp and
walks to the table. Plays the Tape. Good evening Mr —- “Your task, if
you accept the assignment, is to get the maximum out of the $366 million
Macquarie Bank has paid building a portfolio of bush, sorry, regional radio
assets in Australia. We want a profit when the deal is floated or sold to
investors and we want a continuing stream of management fees, plus an
annual and not to hard to achieve performance fee. Much like Macquarie
Airports.

If you
decide to accept this task, you will have to work with Mr Tim Hughes, executive
chairman of Macquarie’s new media group, Regional Radio Pty Ltd.

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This tape
will morph into an Olympics call from Ray Hadley within 10 seconds, sorry,
this tape will self-destruct within 10 seconds. Fame, fortune and an executive
directorship awaits you should you succeed. And you will!.”

Fanciful,
well look at this story from The Age website
and from Macquarie Bank earlier in the year – here.

Why would
the smartest bunch of investors in this country spend more than $360 million
building up a dominant position in regional radio in this country if there
wasn’t a very tasty deal to be done with a health return down the track?

Its quite
clear that Macquarie has bitten the bullet and put together the biggest
collection of radio assets in this country with the long rumoured deal to buy
the DMG Radio regional stations for $193.5 million.

That will
ease some of the undoubted financial pressure on DMG which has spent hundreds
of millions of dollars buying radio licences in Australia in recent years,
including those for the successful Nova stations.

Macquarie
will add these to the RG Capital Radio stations it bought earlier in the year
for $173 million, making a grand total of $366.5 million.

The move
will see the DMG regional assets and those of RG Capital under the same roof. A
much more modest attempt at an asset shuffle failed when a deal at the end of
2002 between RG Capital radio and DMG over stations on the NSW Central
Coast fell over. Read more here.

Now they
are all under the same roof and Macquarie Bank cynics will sniff another
infrastructure style asset play coming on.

And they
would be probably right. But these radio stations are not infrastructure in the
way tollways, airports, or even the radio and television transmitters Macquarie
bought and bundled up a couple of years ago.

These radio
assets are infrastructure of a different kind. These form part of the
commercial infrastructure of the various communities where they are based.

They are
local monopolies or part of a local duopoly and many big time investors will
kick themselves silly in a couple of years time that they didn’t have the
foresight to try and do the deal.

DMG had 57
mainly music based stations in 29 regional (bush) markets in NSW, Qld, Victoria,
South Australia and Western Australia.

RG Capital
had 36 stations throughout regional Australia.

There is
some overlap and the Australian Broadcasting Authority has given the new
company 12 months to fix up to sell seven of the 93 stations to remove cross
over between DMG and RG Capital Radio stations(an opportunity for a budding
radio mogul perhaps).

Not
included is the DMG Radio licences on the NSW Central Coast or on the
Queensland Sunshine Coast. They would be considered to be the jewels in the DMG
regional portfolio, but there is overlap with RG on the NSW Central Coast as
the above story reveals.

The ACCC is
having a look at the deal and Regional (Macquarie) has offered unspecified
undertakings regarding the transition and the sale of the licences. ACCC
disapproval would be the only factor that could sink the deal.

And why am
I so confident that the new group will be packaged up and sold. Simple.
Macquarie Bank is risking its own capital in putting this together, just as it
did with the transmitters in Macquarie Communications Infrastructure Group.
That was refinanced and packaged up and marketed to investors.

Macquarie
Chief Financial Officer, Greg Ward said that the annualised impact on the bank
of the radio deal, “after taking account of depreciation, amortisation and
funding costs will be marginally profitable.”

“Mr
Ward stated that the impact on the Macquarie Bank’s capital position will be a
reduction to the Tier 1 capital ratio of approximately 1.2%”, the
statement said.

Doesn’t
seem much, but its a sign Macquarie Bank is risking its money to get
this deal to the starting line, then refinanced and marketed to investors in
the next couple of years.

Tim Hughes
will have the job putting the stations together, cutting costs, getting savings
through shared services and negotiating better deals from advertisers because
of the greater audience clout.

Macquarie
would not have done the deal without it being confident of not only no capital
loss, but also a good profit on sale and a rich stream of continuing fees.

Investors,
you have been warned!.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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