As a small investor in several Macquarie Bank satellites, the huge
fees, tax planning and accounting treatments never cease to amaze. For
instance, how is it that the old ABC and SBS transmission towers
business Broadcast Australia can earn huge profits while its 100%
owner, Macquarie Communications Infrastructure Group (MCIG), continues
to declare losses.

This is the way it works: Broadcast Australia is very profitable with
growth in revenue and profits exceeding 20% most years thanks to
lucrative contracts with the ABC and SBS. EBITDA margins are about 60%
as this is a monopoly and taxpayers have nowhere else to go for
transmission because the only other tower owner in capital cities is
TXA, which is owned by Channels 7,9 and 10.

BA earns monopoly-like profits, which MCIG uses to make huge payments
to stapled security unit holders (we’re not actually shareholders).
These payments, which come out of pre-tax profit, plus huge
depreciation charges, mean MCIG declares a loss and hence doesn’t pay
tax!

This clever accounting means the Federal Government has a lower tax
take from something that should pay tax. The payments to unit holders
are set at a level so that the yield is double the market average. MCIG
briefs analysts in this way and even forecast future payments at the
IPO for the first three years.

The long term nature of the ABC digital contracts (ten years plus two
five year options) means certainty in revenue streams for BA and MCIG.
However, MCIG is literally giving the farm away – instead of investing
some of the profits for the future when analogue shuts off, they are
lavishing it on the unit holders. Virtually all the free cash flow goes
to unit holders which has led to a rapid increase in equity valuation.
The original float was priced at $2 and the stock is now $5.40, so
investors are very happy and the Federal Government is looking silly
for selling too cheap and then not clawing enough back through the tax
system.

While stapled security holders are doing well, so is Macquarie Bank,
which has pocketed huge performance fees in addition to the management
fees because Broadcast Australia simply does what it is supposed to do.

The MCIG directors have also done well. Chairman Gerry Moriarty, a Kiwi
who was poached from Telstra, has bought a vineyard and property in New
Zealand as his retirement business with some of his bonus money, and BA
managing director Graeme Barclay has upgraded into Killara’s millionaire row on Sydney’s North Shore.

Only four BA executives are millionaires who are on the payroll of
Macquarie Bank. Everyone else is an employee of BA and on industry
average wages plus 4-8% bonus. Graeme Barclay has a business philosophy
of “sweating the assets” and he just loves the glacial conversion to
digital because this means poor old Aunty and SBS have to pay BA twice
to broadcast the same channel in analogue and digital for seemingly
years into the future.

The more the moguls manage to delay digital conversion, the more
Macquarie Bank makes because the ABC has already signed long term
contracts to roll out digital broadcast services – even if no-one is
watching digital TV. The ABC could be broadcasting to less than a
hundred digital set top box owning homes in some regional areas yet be
paying
up to $100,000 per year for that transmission service.
Digital TV transmission fees vary between $25,000 and $100,000
per site, and when we’re talking 600 sites around the country, it’s
extremely lucrative.

However, has anyone considered the long-suffering taxpayer in all of
this? No wonder there’s no money left for local drama and the Federal
Government keeps topping up Aunty for specific digital commitments. As
new ABC managing director Mark Scott comes on board, he should consider
how much of his budget has finished up in big mansions and a nice New
Zealand winery for the lucky few inside the Millionaires Factory.

Peter Fray

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