Freeserve in possible takeover talks

Sources tip Wanadoo as the possible buyer, but company's share rally doesn't last

Shares in maverick UK Net giant Freeserve (quote: FRE) soared Wednesday as the pioneering ISP announced it is in talks that may lead to a takeover. Sources said the discussions could -- as with previous talks -- come to nothing.

A company spokesman confirmed early Wednesday that Freeserve is "in discussions which may or may not lead to an offer being made". The possible deal would be entirely in stock, leading to speculation the mystery buyer is France Telecom's Wanadoo. France Telecom has said in the past it will only do Internet deals in stock.

Freeserve said a buyout would be unlikely to carry a premium, on the basis of Tuesday's share price of around 145p. Nevertheless the company's share price soared Wednesday as high as 160p in morning trading before settling to around 147.5p, a 1.5p or 1.03 percent increase, by midday.

Wanadoo is also rumoured to have been in talks with LibertySurf and the Freeserve discussions are said to be at a very early stage. "Wanadoo is in talks, but they are at a very early stage and may not lead to anything," said one source close to the matter.

Critics have charged Freeserve with focusing too closely on the limited UK market, without expansion plans that would allow it to compete effectively with deep-pocketed rivals such as America Online.

Freeserve's parent, electrical retailer chain Dixons, has been looking for a buyer for Freeserve for several months, but has had no luck since talks with Germany's T-Online broke down in June. In the meantime Freeserve's share price -- along with those of other Internet-based businesses -- has plummeted from highs of 977p in March to all-time lows of 128.5p.

Freeserve was the first to popularise "free" Internet access, which collects fees from a cut of the dial-up phone call rather than a monthly subscription. More recently the company has moved towards a more sustainable business model based on advertising and e-commerce.

Reuters contributed to this report.

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