Outlook: Breakdown in communications

Outlook nn delays to BA's american link, ionica's problems and why newcastle's head-hunting will be hard
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The Independent Online
THE TELECOMS company Ionica inhabits two parallel worlds. In one, customers cannot sign up fast enough for its revolutionary wireless telephone service, drawn by the promise of 10 per cent off their existing bill and a funky black box on the outside wall. In fact, Ionica's problem is not lack of demand but lack of capacity.

In the other world, investors cannot sell their Ionica shares quickly enough. It has been one of the stock market's all-time duff investments. In fact, the question is not if but when the company will go out of business.

More and more frequently these days the two worlds collide and Ionica's management is forced to explain to a bemused staff why a company that was launched with such high hopes is now regarded as the pariah of the Square Mile.

The answer lies in relative expectations and, in the City, the expectations of Ionica are not good. Yesterday the shares drifted down another 11.5p to close at 24.5p compared with an issue price of 390p less than a year ago when SBC Warburg Dillon Read brought Ionica to market. Even though there is 50p a share of cash in the business, it is trading at less than the break-up value of its assets.

And yet Ionica's basic proposition remains a good one. It has targeted the local loop (known to the rest of us as the domestic market) where, as BT proves every day, profits are easier to earn than in long-distance. What's more Ionica's technology allows it to sign up customers for a fraction of the cost of the cable companies.

Where Ionica has come unstuck is in the execution. It underestimated the complexity and cost of rolling out its network of base stations and it did not have the software ready in time to meet initial customer demand. The result is that roll-out is at least two years behind schedule, customer connections are not being achieved at the rate promised and the banks have said no more money until new equity investment is brought into the business.

A further question mark over Ionica is whether it will miss out on the explosion in data traffic because of the nature of its technology and the decision to concentrate on domestic not business customers. This remains an unknown.

The funding gap is also not known with any precision. But Ionica will need to find at least another pounds 700m on top of the pounds 600m already raised to complete the network. Or someone else will.

The prospect of massive dilution helps explain why the share price has taken it so badly. But at the same time it makes Ionica an interesting proposition for a big foreign brother like say Deutsche Telecom. If Ionica can find the right kind of strategic investor, then they will be able to pick up a business that already covers one in eight UK homes for a fraction of the price investors paid last July. It will be brutal for existing shareholders but all may not be lost just yet for the company itself.