Ionica set for pounds 625m float to do battle with BT

A radio-based telecoms contender set up five years ago is signing up customers fast. Michael Harrison reports
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Ionica, the company that is setting up a rival domestic telephone network to British Telecom based on innovative radio technology, is to go public next month through a stock market flotation that will value the business at pounds 625m.

The company, formed five years ago by a science graduate from Imperial College, intends to raise pounds 125m through a listing in London and New York. About 20 per cent of the company will be offered to investors. At the same time Ionica plans to raise a further pounds 200m in debt to help build out its network, taking the total amount raised so far to pounds 760m.

The company's 350 shareholders, who include Yorkshire Electricity, Northern Electric, 3i and a number of other venture capitalists, investment trusts and banks, have agreed not to sell any of their shares. In addition, Ionica's eight largest shareholders have signed a lock-in agreement which prevents them selling any shares for a year after the flotation.

The flotation will make Nigel Playford, Ionica's chief executive, worth pounds 31.5m on paper. He will hold a stake of 5 per cent after the offer. Mr Playford and Ionica's four other executive directors who together started the business in 1992, own 7.3 per cent of the company. The 800 staff own a further 3 per cent.

The Cambridge-based company began offering a service to residential and small business customers in the Anglia region a year ago and extended its service to the Midlands in February. So far it has 24,000 customers out of the 1.2 million homes passed and has achieved a connection rate of nearly 3 per cent in its launch area. It aims to achieve a market share of 5 per cent by 2001, by which time its network of base stations and exchanges should cover 80 per cent of the country.

But a study published yesterday by its financial advisers, SBC Warburg, estimates that it could have captured 10 per cent of the market by 2004. On that basis SBC Warburg puts Ionica's enterprise value - equity plus debt - at between pounds 860m and pounds 1.3bn and forecasts a pre-tax profit of pounds 82m by 2001-2002. In the 12 months to the end of March this year it made a loss of pounds 44m on income of pounds 15m.

Ionica's selling point to investors is that its up-front capital expenditure is a fraction of that incurred by cable companies because it incurs costs only when it signs up a customer. Its biggest capital cost is the radio aerial fitted to the outside wall of each subscriber's home. From there calls connect to a remote base station in the local area - usually on top of a high building. The station is connected to an Ionica telephone exchange which is in turn connected to the national phone network.

SBC Warburg's research puts the cost of connecting each Ionica customer at just pounds 16 compared with pounds 800 for BT and pounds 500 for cable subscribers. Mr Playford says: "The reason shares in the cable operators have done so badly is that they made promises they have not been able to keep. We can break even with 2-3 per cent of the market and make our shareholders very happy people indeed with 5 per cent."

Ionica's strategy, however, is to compete not with the cable companies but with BT. Its charges are fixed at 10 per cent below those of BT. Each time BT cuts its charges, Ionica follows suit.

"Although price is part of the message, there is no point just marketing yourself as a cheap telephone company. We sell Ionica as a high quality telecoms provider. Because it is delivered by digital radio we don't have the costs of digging up the streets to get to people so we can pass on those cost savings to customers. Copper local loop is a physical asset which deteriorates with time and is also labour-intensive. Ours is a low maintenance network."

Despite Mr Playford's scientific background and Ionica's high-technology image, the company's main focus of attention is on a high-profile saturation marketing campaign. Its advertising budget, at pounds 20m this year compares with the pounds 150m BT spends but BT has 27 million customers.

Two-thirds of its customers come from advertising but it has also begun to send teams out selling door to door. Mr Playford says that when they go down a street of 100 houses, they come back with 10 houses signed up .

Whereas Mercury and Energis, the telecoms network owned by the National Grid, have built national trunk networks which then rely upon the local BT loop to get access to customers, Ionica has approached the market the other way around. It operates a local loop and plugs its calls into whichever trunk operator is offering the best and most competitive service.

Mr Playford is not worried by about BT's campaign to win back customers or the fact that the cable operators are getting their act together and consolidating through the Cable and Wireless Communications alliance.

"BT's win-back campaign is a total illusion designed to motivate a demoralised workforce. It should really be called a stop loss. The market is vast - pounds 7bn a year - so there is plenty to share for everyone."The cable companies, meanwhile, don't have a sensible billing system and no proper IT systems. They started offering their services four years ago and yet we beat them to number portability. What on earth are they playing at?"

So far Mr Playford has led from the front. He prides himself on the fact that of the 50 most senior managers in the company no one has left Ionica other than "one or two misfits" as he describes those who were not equal to the task. Staff turnover among middle management is running at only 1-2 per cent and even among the most junior staff, such as telephone sales assistants, its is only 5 per cent.

As Ionica prepares for the scrutiny that goes with a public listing and adjusts to the demands imposed by actually running a business as opposed merely to planning one, Mr Playford is aware of the pitfalls that may lie ahead.

But as he surveys the landscape, he cannot spot any obvious disaster waiting to happen."When we started in 1992 we had no technology, no money, no staff, no customers, no interconnection and no number portability. Now we can tick every one of those boxes. If we do no more than we are doing now we will do fantastically well.

"We have access to all the important capital markets, I can't see any new technology coming along that will zap us and the market is unlikely to be flooded with new entrants because there isn't the space available on the radio spectrum. BT could hurt us on price but to do that it would have to chop off its own feet and take the pain as well, but why would it want to do that when we are only aiming for 5 per cent of the market?"