Freeserve and Wanadoo seize the day

Deal would create Europe's second-largest Internet service provider and add 2bn euros to Freeserve's coffers

On Wednesday France Telecom's Wanadoo unveiled an offer to acquire the UK's leading Internet service provider, Freeserve (quote: FRE), in an all-share deal that would create Europe's second largest Internet provider.

Freeserve chief executive John Pluthero portrayed the offer as a victory for Freeserve, despite failed talks with Deutsche Telekom over the summer that would have placed a much higher value on Freeserve's shares. "This has made us feel a bit like when we launched Freeserve originally," Pluthero said. "The world is once again full of opportunities."

Electrical retailer Dixons (quote: DXNS), which owns 80 percent of Freeserve, has committed to the deal, pending shareholder approval. Freeserve's board of directors has also committed itself, and the deal only requires approval by 75 percent of all Freeserve's shareholders, including private investors.

Dixons said it will call a shareholder meeting in early January to address the offer, but the company is understood to be under investor pressure to reduce its holdings in the Internet market.

Wanadoo is offering new shares in exchange for Freeserve shares, valuing each Freeserve share at approximately 157p, a more than 10 percent premium on Freeserve's closing value Tuesday. Pluthero said he is confident shareholders will approve the deal. "I can give you three reasons why I think our investors will be overjoyed to be investors in Wanadoo: 2bn euros in cash, Orange and ntl," he said.

Wanadoo has about 2bn euros in cash, and its parent France Telecom owns wireless provider Orange and has a stake in cable provider ntl. The Orange and ntl holdings would give Freeserve opportunities to further expand into channels such as WAP and cable-based broadband.

Both Wanadoo and Freeserve have been seeking to expand beyond national boundaries as a way of enlarging their total audience and gaining momentum against giants such as AOL on the ISP front, as well as international portals such as Yahoo! and MSN. Wanadoo, which currently has only about 500,000 subscribers outside France, will move closer to its goal of achieving 10 million subscribers by 2003. "This objective is now clearly reachable," said Wanadoo chief executive Nicolas Dufourcq. The next logical step would be into Europe's other big Internet market, Germany, but Dufourcq said no other subscriber-growth acquisitions are immediately on the cards.

Freeserve, which launched in 1998 and became one of the first to base its business on the "free" business model, has seen its business grow quickly and is currently the UK's largest ISP. However, it is increasingly necessary to exert buying power on a larger scale in order to land high-profile content deals, according to the companies and to industry observers. For example, a recent Madonna concert in the UK broke all records for a Webcast -- but was hosted by Microsoft-backed MSN. "The ability to acquire entertainment-driven content will be important in the future," said Dufourcq.

Pluthero said Freeserve's drive into the new flat rate, or unmetered, market will be unaffected by the deal, and the company will continue its relationship with telecoms provider Energis (quote: EGS). "We are at the forefront of that evolution and intend to use it to increase our market share," Pluthero said.

He said the Freeserve brand will remain in the UK. "Our customers will see very little difference aside from the rollout of new tools and services over time," Pluthero said.

Wanadoo's Dufourcq said no job losses are planned. "It's already difficult enough to find the talent," he said. "It's not on the agenda."

Would the acquisition see a situation similar to France Telecom's acquisition of Orange, with Orange chief executive Hans Snook walking out after six months? Dufourcq said the comparison was "not appropriate" because Wanadoo and Freeserve are both essentially startups of about the same age.

"I'm absolutely committed," Pluthero said. "I've signed up to that fact, and I feel that way."

If the deal goes through, Dixons will own 12.7 percent of the new Wanadoo, France Telecom will own 74 percent, the public will own 12.5 percent and Wanadoo employees will own 0.8 percent.

Dixons will have the option to immediately sell 20 percent of its Wanadoo holdings, and is likely to sell at least part of that, the retailer said. However, Dixons said it plans to maintain long-term holdings in Wanadoo.

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