Business Opinion:  Tomorrow, the Broadcasting Commission of Ireland will make public details of the applications for the latest Dublin radio licence, by  John McManus.

Many of the names behind the five bids for the alternative rock station licence have already emerged and they are a cross section of the Irish media industry including Bob Geldof, Paul McGuinness, Denis Desmond and Denis O'Brien to name a few.

Their interest is not surprising given the €26 million that Scottish Radio Holdings paid last October for FM104.

The price surprised many and has set a new benchmark for Irish radio stations and the value of the spectrum allocated under various radio licences.

The robustness of the price paid by SRH was analysed by OX consultants, the Danish firm hired by the Department of Communications to review the commercial radio licencing regime. Their report, published last week, examines the deal in detail.

They looked to see if the price was compatible with the two valuation methods commonly used in the industry. The first of these is peer group valuation. This involves looking at the relationship between the price of other radio stations and financial indicators such as their turnover and net profits. These multiples are then applied to the company you want to value to calculate a price.

OX looked at a number of listed radio holding companies in the UK and the US and found that on average, they were valued at 3.5 times turnover and 43.1 times net profit. Applying this to FM104's turnover of €7.5 million and net profit of €800,000 would produce a valuation range of €26.4 million to €33.6 million.

The price also stacks up on the basis of the other valuation method which is to discount the future cash flow of the business to reflect the riskiness of the cash flow. This came up with a valuation between €15 million and €28 million.

OX also calculated that the value of the shareholder's investment in FM104 when it was sold was only €3 million, reflecting the fact that radio licences in the Republic are in essence given out for free. It suggested a profit well in excess of €20 million for the exiting shareholders.

The size of the capital gain made by FM104's shareholders from selling an asset granted to them by the State for free prompted a lot of comment, and the Minister for Communications, Mr Ahern, suggested that the State might look at some sort of clawback mechanism in the future. The whole issue of how the Government can get a share of the value that is created by the exploitation of radio licences was addressed by OX.

They were not in favour of clawbacks and instead recommended auctions and/or a system of royalties and fees. Publishing the report last week, Mr Ahern, indicated he saw significant merit in such a change of tack.

But, as is the way with such things, it is not quite that simple. As part of the FM104 exercise, OX consultants looked at the value of seven regional stations.

Three of them were worth significant sums, based on the peer valuation method and using the net profit multiple employed to value FM104. Most notably, Midwest Radio was valued at €10 to €11 million and Wexford radio was valued at between €6 and €7 million. Tipp FM was valued at between €2.2 million and €2.4 million.

However, the other four stations were valued at zero, reflecting the fact that these stations were hardly profitable, something that many of the smaller stations revealed informally to the consultants.

The consultants attach several health warnings to their analysis, but it is clear that many radio stations are not very profitable under the present regime. They then point out that "if more competition is allowed and available radio spectrum is shared among more radio stations, the station will become less profitable and value may be destroyed".

OX then goes on to say: "The Government of Ireland should carefully consider the value that will be created by the individual radio stations when allocating the radio licences."

In essence they are saying that if the Government is keen to maximise the value it can extract from radio licences, through auctions or royalties for example, it should license a smaller number of larger stations.

Going down this road would require a revision of the current policy as set down in the Radio and Television Act of 1988. It makes commitments to diversity of services catering for a wide range of tastes in any given area. It also specifically mentions minority interests.

Any attempt to change this policy will meet with significant opposition from all sorts of people, not least the politicians who make very good use of the medium of local radio.