Ionica looks doomed without rescue cash

News Analysis: Plans for a new national telecom network are in ruins after a `woeful tale of mismanagement'

IONICA YESTERDAY moved a step closer to complete bankruptcy when it warned shareholders that it had failed to find a strategic investor to rescue the troubled wireless telecom group.

Ionica also announced it had instructed its financial adviser to start talks with holders of its bonds about restructuring its crippling debt load.

"There can be no assurance that a strategic investor will be forthcoming, nor that any restructuring will be completed," Ionica warned, adding that a further announcement was expected shortly.

Shares in Ionica tumbled 16p to an all-time low of 26.5p - a catastrophic fall from its 390p flotation 12 months ago. The plunge, which has seen the company's market value fall from pounds 640m to just pounds 45m, makes Ionica one of the most disastrous flotations of all time.

Sir James McKinnon, Ionica's chairman, yesterday became the latest director to resign. Finance director John Edwards, operations director Robert Lindsey and commercial director Derek Laval had all previously left the group.

Nigel Playford, Ionica's ebullient founder, stepped down as chief executive in January, to be replaced by Mike Biden, a former BT executive. However, Mr Playford still sits on the board as deputy chairman. A clause in his contract reveals that he can only be asked to resign as a director if he owns less than 5 million Ionica shares - half the number he currently holds.

Last night, analysts were gloomy about the company's prospects of finding a saviour. SBC Warburg, Ionica's financial adviser, is believed to have trawled the telecoms market for potential investors without much success.

Although Ionica has pounds 60m of cash left over from its flotation, observers said potential investors were unlikely to take the risk until the company restructures its heavy debt load. The company had arranged a pounds 300m loan facility to finance its expansion. But it breached the covenants on its borrowings - which were linked to the growth of its customer base - earlier this year and yesterday said it had decided to terminate the loan facility. "It's just a woeful tale of mismanagement," one analyst concluded.

It was all so different a year ago, when Ionica made a sparkling debut on the Stock Exchange. Its flotation, which raised pounds 147m, was five times oversubscribed and the shares raced to a 10 per cent premium on their first day of trading.

Ionica's strategy was simple. The group planned to develop a national telecom network at a fraction of the cost of the one owned by British Telecom. This would allow it win over customers by offering steep discounts to BT.

The key to this was Ionica's technology. In co-operation with Nortel, the Canadian group, Mr Playford had developed a wireless radio technology which could carry telephone signals. Ionica customers would have an aerial fitted to their house, which would transmit and receive phone calls to a base station several miles away.

By not having to dig up the roads, Ionica would be able to save costs. Mr Playford even turned the technology into a slogan: "Waves not wires".

It all seemed to make sense. In a move that should alert all investors to the dangers of forecasting, SBC Warburg predicted that the company would grab 10 per cent of the UK market within six years - making it the main challenger to BT.

Within months, however, forecasts had gone up in smoke. In November last year, Ionica shocked investors with the revelation that new software had been delayed, forcing it to scale back expansion plans. The existing software, meanwhile, struggled to cope with demand, leaving fuming customers unable to get through.

It also emerged that many of the customers who had been attracted to the cut-price service were poor credit risks who did not pay their bills and were thrown off the network shortly after signing up.

By January this year Ionica was hopelessly behind schedule and its financial plans were in tatters. Banking covenants, which required the company to have 195,000 residential phone customers by the end of 1998 and be able to offer a service to 3.8 million homes, now look madly optimistic. Yesterday, Ionica revealed that at the end of June it had just 49,332 customers and offered service to 2.8 million homes.

Some of this is clearly down to poor management. But Ionica's strategy was also at fault. Fixed radio access technology has been made to work in other parts of the world, not least in Scotland, where Atlantic Telecom, a rival group, has had great success offering a service in Glasgow.

Graham Duncan, Atlantic's executive chairman, points to several flaws in Ionica's strategy. "With the benefit of hindsight, you can say they tried to be all things to all men," he says, referring to the group's determination to build a national network. Atlantic has succeeded by concentrating on building infrastructure in densely populated cities, where each base station covers a wider potential customer base.

Although his comments suggest a way for Ionica to salvage its business, it may be too late. Analysts now believe that potential investors would only be interested in Ionica's national telecom licence and its royalty agreement with Nortel, whereby it gets a small cut of revenues on the wireless technology if it is sold elsewhere. But they point out that both of these could be picked up much more simply and cheaply if the company goes into administration.