City boots up for Net float fever

A WAVE of Internet-related flotations is expected in the wake of Netscape, the US software company valued on its first day of trading at 40 times turn- over, and Unipalm, a UK firm that lets Britons hook up to the Internet. Unipalm's shares jump- ed 20 per cent to 390p one day last month, when it revealed it might be a takeover target.

Internet-related companies are being courted by bankers and brokers, partly because of their scarcity. At least three companies are being touted as potential floats: Demon Internet, Cerberus Sound and Vision, and Easynet. Demon, the largest supplier of Internet connections to the UK's Net surfers, is rumoured to be the first in line to go public. The company denies any immediate plans, but Steve Kennedy, its business development manager, said: "Who knows after that?" Demon plans to start an aggressive expansion campaign in Europe next month, backed by venture capital it raised last week from an undisclosed backer. It aims to increase the number of Internet users it serves from about 40,000 now to more than 130,000 by the end of the year.

Ricky Adar, founder of Cerberus, said he has had several "very tempting" offers. Cerberus is launching a digital jukebox service, which enables users to copy music from the Internet. Last week it signed a deal giving it the use of a library of 65,000 songs. Another of its products is a cash and credit-card payment system called Cercure, which is about to be commercially tested and could be floated as a separate entity.

Easynet is the owner of the Cyberia cafe chain, where customers can sip cafe latte while browsing the Internet on computers rented by the half hour. The chain is expanding fast, both in the UK and abroad. But it also offers its own slip road to the information superhighway for stay- at-home users. "We are only a year old and have a lot to prove," said Grahame Davies, managing director of Easynet. "But we could be looking at a float in the New Year."

Experts warn, however, that the sector may have been over-hyped. The launch of Microsoft Windows 95 has received massive free publicity, as did the flotation of Netscape, a loss-making company that sells software to make browsing the Internet easier. Stock valuations may have been lifted unrealistically high.

Providing Internet access is becoming cut-throat. Analysts point out that Unipalm's profits come from software distribution, not signing up subscribers. Many smaller companies will be knocked out of the market once BT and Mercury muscle in. BT has already started providing access, and Mercury is rumoured to be the mystery bidder for Unipalm. Some cable companies are planning to offer Internet connections over phone lines.

John Stewart, managing director of Electric Mail, which integrates Internet systems for companies, points out that while the stock market is valuing Unipalm at over pounds 80m, "a competitor could rebuild the whole business from scratch in a year for pounds 25m and save pounds 55m".

Like multimedia companies in general, Internet firms tend to be unprofitable, said Nick Croydon, joint managing director of CD-Rom publisher First Information Group, which is backed by venture capitalists 3i. "A lot of companies are like us. We haven't sold a single product yet. We are planning to move from revenue of about pounds 2m to pounds 10m by April and from loss to profit, but how do you value us today?"

Plenty of people are prepared to try in the hope of making a killing but, said John Scaife, who runs multimedia consultancy Charon Capital: "A lot of people don't know what they are buying. Investors should look at what these companies actually own. In a lot of cases the answer is: not much."