Bluechip: Ionica on right wavelength

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IONICA, the residential telephony business that transmits customers' calls by radio signals, will hit the stock market on Friday. The price will be between 370p and 390p, to value the enterprise at around pounds 570m, and will raise pounds 125m through a placing of about 22 per cent of the shares to UK institutions.

Set up in 1991 by its chief executive Nigel Playford, Ionica uses a fixed radio network to relay calls between customers and the national telephone network. Ionica's customers have a small radio aerial attached to their home, which receives and transmits signals to a local area base station, and from there on to the telephone network.

Ionica became operational in mid-1996, when it launched its service in the east of England. To get this far, the company has raised pounds 440m. By the time it has finished rolling out its service in 2002, it will have spent pounds 1.1bn.

So what makes Ionica worth backing? Mr Playford has two big claims: the equipment it uses is cheaper to set up than that for cable companies; and it need take only a 5 per cent market share from BT to be a success. On the cost front, his claims seem to hold good. Cable companies have had to make huge investments in infrastructure, digging up the streets and laying miles of cabling. Ionica has only to erect cheap base stations.

It is the market dominance of BT which will test Mr Playford's ambitions. BT has 91 per cent of residential lines, and 92 per cent of business lines. But cable companies have shown what can be done. In areas where they have built a network, their penetration of the residential market is often over 20 per cent.

Ionica has been sold on what has been described as a low price by its advisers, to reduce concerns over the use of a discounted cash-flow valuation.

Yet the risks may be containable, if only because of the limited infrastructure spend. One of the troubles to dog any entrant into this market is BT's monopoly position. BT has the pockets to fund predatory pricing, and force out competition. But it is limited from doing this by the regulator. As a consequence, its prices remain low.

A more effective investment proposal might be to sign up to Ionica's service. If nothing else, you are guaranteed a 15 per cent saving off a standard BT bill.

Richard Phillips Copyright: IOS & Bloomberg