IN March 1994, bombs were going off near Johannesburg's business district and thousands of people were dying in the wave of political violence leading up to the country's first multi racial elections.

Money was also pouring out of the country as fast as people could find loopholes in South Africa's draconian exchange controls. The very notion of foreign investment was a joke.

Yet in that month, Dr Tony O'Reilly and Independent Newspapers agreed to pay £20 million for a 31 per cent stake in Argus Newspapers, South Africa's leading chain of English language newspapers. Two years later the gamble is paying off.

Next week media analysts expect Argus since renamed Independent Newspapers South Africa to release annual figures showing earnings per share up by over 30 per cent. The shares for which O'Reilly paid 11.4 rand (£1.94) each 1994 and 13 rand each in 1995 when Independent increased its stake to just under 60 per cent are now trading at 18.5 rand on the Johannesburg Stock Exchange.

Analysts say the investment, which cost Independent Newspapers £49 million, is now worth about £73 million. Costs are reducing, profits increasing and margins improving. Without any serious competition in sight, analysts are up beat (to say the least) about the company's prospects.

There is, they say, only one cloud on the horizon figures released two weeks ago show that, over the past year, the circulation of Independent's five main daily titles in Johannesburg, Durban and Cape Town has fallen from a total of 492,740 to 415,280, an average drop of more than 15 per cent.

In any other English language market, such a collapse would be catastrophic. In South Africa it matters less. With a near monopoly on the English language market throughout much of the country, media analysts say the company can shed circulation without having to worry yet about losing advertising or market share.

Three out of four English language newspapers sold in South Africa each weekday are from the Independent stable. The company owns every English newspaper produced in Cape Town, Durban, Pretoria and Kimberley while its flagship, the Star, still dominates the Johannesburg daily market with a circulation of 165,171.

The country's biggest selling daily, the black oriented Sowetan, is 42 per cent owned by Independent, but Dr O'Reilly's company holds the management and printing contracts.

When Dr O'Reilly purchased his first stake from Mr Harry Oppenheimer's massive Anglo American Corporation he was taking advantage of a buyer's market. Anglo was having little luck in off loading the company and had already approached several international media moguls, including Mr Rupert Murdoch and Mr Conrad Black, before Dr O'Reilly indicated he was prepared to take the political risk.

Provided business confidence in South Africa held up, Argus held out excellent prospects for a foreign newspaper group like Independent Newspapers. Its profit margins were depressed by the inefficiency born of isolation and could easily be raised. Cover prices were so low that raising them would bring in more revenue than would be lost through falling sales.

According to Mr Peter Armitage, a media analyst with Johannesburg stockbrokers Ivor Jones Roy, Independent's success in South Africa is based on two significant factors.

First, the company took the strategic decision to raise cover prices by an average of 25 per cent and accept a fall in circulation. Second, it improved its margins by investing nearly £10 million last year in the latest printing technology and by introducing stringent international cost accounting techniques.

The result, he says, is that earnings per share are expected to increase by 40 per cent a year for the next two years.

There is little prospect of any real competition to disturb the flow of revenue. Rival titles would cost too much to launch and, despite complaints from Independent's rivals and detractors, Mr Nelson Mandela's ANC led government is unlikely to order Independent to sell off any of its South African newspaper titles. The ANC was consulted on each stage of the acquisition.

According to Mr Armitage the major threat to Independent's long term prosperity is falling sales.

"If you increase prices you'd expect to see a gradual rise in sales afterwards," he says. "Circulation hasn't rebounded to the level that I think management would have been comfortable with and I think there are some concerns."

Nevertheless, sales have not yet decreased to the point where advertisers start demanding lower rates, or switching to other media.

While Dr O'Reilly's detractors in South Africa like to blame the sales slump on a drop in journalistic quality resulting from a cost obsessive regime, the analysts point out that newspaper sales have been falling across the board. The quality of South African journalism in general is not high, says Mr Armitage, but Independent probably does enough to hold what readers there are.

The Irish managing editor of Independent Newspapers in Africa, Mr Ivan Fallon, says the company is not at all worried by the drop in sales, which he ascribes to a deliberate strategy to cut distribution costs.

Nor does he like to review the company's success solely in terms of management techniques the group has redesigned and relaunched most of its existing titles in the past two years and introduced two major new products, he points out.

The first, Business Report, is a pull out supplement to the group's morning titles designed to take on Business Day still owned by Anglo American TML subsidiary for the key business market.

The second, the Sunday Independent, is the first new newspaper to be produced by Dr O'Reilly anywhere in the world. Launched nine months ago as a quality rival to TML's mass market Sunday Times South Africa's biggest selling newspaper the Sunday Independent has exceeded its target sales of 30,000 a week.

It is still unclear whether or not these innovations will succeed in the long term Business Day's circulation has increased nearly 6 per cent since its rival appeared. But even without them, Independent's newspaper holdings in South Africa seem certain to be a major revenue earner for years to come. Dr O'Reilly is unlikely to be content with that, however.

According to Mr Fallon, Independent is now seeking involvement in South Africa's electronic media, despite cross ownership laws which prevent it taking more than a 15 per cent stake in any broadcast company.

Only 3 per cent of South African adults buy a newspaper every day, compared to 36 per cent in Britain and 62 per cent in Norway, so broadcast is likely to dominate the South African media to an unusual extent.

Moguls like Mr Murdoch, who passed up on Argus in 1994, are now sniffing around South Africa for openings in the broadcast market. Dr O'Reilly, currently the biggest media player in South Africa, would not like to be left behind.