Our friends at Macquarie Bank have been in touch and offered up a detailed reply to last week’s items about Macquarie Communications Infrastructure Group. The company with the alluring ASX code of MCG operates Broadcast Australia – the business which owns the transmission towers used by the ABC and SBS. The whole debate has been packaged up here on the site but some of the key points made by the Millionaire Factory include the following:

CRIKEY: “BA’s EBITDA margins are at 60%”

This is true and reflects efficient use of BA’s assets. It primarily reflects the fact that BA is an infrastructure services business that is highly capital intensive. As such BA has high capital expenditure each year and incurs significant depreciation, amortisation (goodwill and intangible contracts) and interest charges below the EBITDA margin line. When these costs are taken into account BA generated a margin of 14.4% in the year to June 2005.

CRIKEY: “BA loves the ‘glacial conversion to digital’ because ABC and SBS have to pay for analogue and digital”

MCG and BA in particular, have been strong public advocates of the move to digital services. They have made such statements to the financial markets, the media, the Department of Communications, Information Technology and the Arts (DoCITA), as well as the Australian Communications and Media Authority (ACMA). BA has been consistent in all its recommendations to Government and relevant agencies over the past four years as to the steps required to accelerate the take up of digital terrestrial receivers by the public. Only with this take-up will it be possible for the analogue TV switch off to occur.

MCG believes that the analogue spectrum released from analogue switch off could be redeployed and used by the industry for other innovative services. BA would be well placed to provide transmission services at that time. Indeed, analogue switchover is seen as an incremental opportunity for BA’s revenue.

CRIKEY: “Digital TV transmission can be as much as $100k per site per annum”

Transmission fees are established either through tender or direct negotiation and reflect the complexity and cost of delivering broadcast services from any one site. In the case of the ABC digital transmission fees were established under contract only after a lengthy tender process in 1999 and 2000, and following an independent assessment by Government as to the value for money offered by BA.

CRIKEY: “Many people in the ABC believe they are paying too much for digital transmission”

ABC is paying prices which reflect market rates. The prices were agreed following a lengthy competitive tender process in 1999 and 2000 (ie well before MCG was created) and the prices were subject to independent consultants (appointed by the Government) to confirm the value for money offered by BA. ABC’s analogue contract pricing was established between the ABC and the Federal Government PRIOR to privatisation. It is MCG’s view that the analogue pricing does not fully take into account the capital and operating costs of the analogue network.

CRIKEY: “Facilities lessees have experienced rental increases of 1000% since 2002”

Facilities leasing arrangements are now entered into at market rates. (The exception is self help community broadcasting which BA and the Government agreed to heavily subsidise). As existing agreements – that were entered into by the Federal Government – expire, BA is repricing these arrangements to market rates. When this happens the increase to market or near market rates can represent a significant percentage increase. BA does seek to negotiate in circumstances where it is obvious the tenant is unable to bear the full extent of the increase.