Lester Spaulding, chairman of the RJR Communications Group. - Ian Allen/Staff Photographer

Radio Jamaica Group (RJR) bosses suggested this week that the decision to pay up to $114 million (US$1.75 million) for a combined 72.5 per cent of the two media companies, RETV and JNN, was meant as a springboard for a deeper foray into the cable television market.

"There are many number of approaches to product development," said RJR's chairman and CEO, Lester Spaulding.

"But in my experience, it is always easier to take and develop something that its tried and proven than starting from scratch."

RJR Group operates three radio channels as well as the free-to-air television station TVJ and recently launched a 24-hour cable sports channel as part of its response to recent spate of mergers, acquisitions and other forms of conglomeration in the Jamaican and wider Caribbean media market.

Then a week ago, the group announced that it would purchase 65 per cent of RETV, a channel 85 per cent owned by young entrepreneur Kimani Robinson and all of JNN, which is owned 50:50 by Robinson and another young business, Balram Vaswani.

However, 20 per cent of the JNN shares will be re-transferred to Robinson and Vaswani, who, respectively, are to remain as managers of RETV and JNN.

RJR announced the sale after market close on August 15. Its shares traded down 70 cents at $4.20 then, and dipped another two cents to $4.18 on the next trading day.

Yesterday, the stock was back at $4.20.

The cable company deal is still to be ratified by RJR shareholders, but the company's management said they intended to pay U$1 million of the purchase price upfront in cash and shares.

The sellers will get US$522,727 cash, while US$477,273 will be satisfied by seven million RJR shares, or two per cent of the group and around J$6.81 a share.

The remainder of the RETV/JNN purchase price, US$750,000 would be due only if the companies receive specific profit targets over a three-year period and the government completes the promised the amendment of regulations to officially allow advertising on cable television.

While there will have to be individual transfer of assets to RJR by the companies, the deal is being completed as a single transaction, which suggests that combined, RETV and JNN would be valued at US$2.4 million or J$156 million.

Neither RJR officials nor RETV/JNN bosses were ready to release the specifics of the valuation.

"The price was one of professional valuation and therefore would have looked present and discounted future earnings," said Spaulding.

According to Vaswani, RETV has been profitable for the past 18 months and JNN is about to turn a profit.

"It is quite a discounted price that the companies are being sold for," he said. "There is a little of hidden intangible value in these companies."

He estimated that over the next 18 months or so, RETV and JNN could account for up to 10 per cent of RJR's net revenue, which, for the financial year to March 31, was J$93 million on sales of J$1.25 billion. For the quarter up to end of June RJR had a turnover of $353 million and profit of $13.92 million.

Assuming a price earning ratio of 10, RETV/JNN, at the price RJR is paying for the companies, would, if they were a single operation, would be a returning a profit of around $240,000 or over J$15.6 million. But it is likely that the PE is this transaction would be lower.

But even at that some analysts have questioned why RJR, with its strong brand-name and long experience in the electronic media market, did not seeking to expand its existing operations into the these niches, rather than buy.

"That is what they are doing with the sports channel," said an analyst who asked that his name not be used.

"It would be perhaps cheaper to than to buy given the opportunity to use existing resources and creating synergies."

"We are trying to short-circuit a process," said the company's deputy managing director, Gary Allen. "They were to market first."

For Spaulding there is also another issue, exemplified by the decision to ask Robinson and Vaswani to stay with the companies they launched and developed. He does not believe that RJR, a mature company, would necessarily bring in an attempt to grab new market segments.

"There is a freshness and pizzazz," he said.

"There is formula there to bring the young market which we do not necessarily have and which we hope to exploit."

- business@gleanerjm.com