Does Wanadoo want Freeserve?

French ISP could be in the game to snap up Britain's biggest ISP
Written by Matthew Broersma, Contributor

Freeserve (quote: FRE), the Internet service provider 80 percent owned by Dixons, could be taken over by French rival Wanadoo, according to the latest industry rumours.

Sunday Business reported this week that Wanadoo, which floated in July, is "in the race" to buy Freeserve, and industry analysts have also pointed to Wanadoo as a new possible parent. Freeseve has been in talks with several ISPs, including T-Online, which was expected to conclude a £6bn deal over the summer. That buyout broke down as Freeserve's share price continued to plummet.

Freeserve said on Thursday unmetered access was helping it win the war for Internet users in Britain, but analysts said it might be fighting the wrong battle and its stock drooped further. Its shares, which have sunk steadily from a March peak near 1,000p and only really rebounded with speculation of a takeover, slumped a further four percent by 0915 GMT Thursday to 233p. In mid-morning trading Monday the shares stood at about 238p.

"The only potential catalyst (for a share rise) could be renewed acquisition talks," said Robertson Stephens analyst Stefan Slowinski. He said Wanadoo might be interested in Freeserve as a way into the UK market.

Freeserve's lower share price could also act as an incentive to buyers looking for a bargain. Other players interested in Freeserve include Terra Networks of Spain and Tiscali of Italy, according to Sunday Business.

After reporting its results the UK's biggest Internet service provider repeated that it was not in any talks that might lead to an offer soon. "These results demonstrate the strength of our business as an independent company," Finance Director Nick Backhouse said. "Our model is to a significant extent a partnership model."

Freeserve said it had profited from rivals' failure to offer viable unmetered access -- as much surfing as you want for a flat fee including call charges. It had a quarter of am unmetered customers -- many disgruntled former users of troubled rival services -- taking its user base up to 2.05m accounts as of last week.

"Our customers have already increased their use of the Internet by nearly one half on last year," said Chief Executive John Pluthero. "As we extend the availability of unmetered access we will drive more users to our portals ... increase time online and generate higher e-commerce and advertising revenues."

But analysts worry Freeserve is paying too much attention to Net access, which is expected to become a commodity eventually, and not enough on developing its content to fight portals like Yahoo!, which do not worry how users arrive on their site. They said the costs of winning those new users, working out at £200 each by some calculations, seemed too high.

For the first financial quarter to 19 August -- which covers 16 weeks -- Freeserve's loss before tax was £17.8m, more than triple the previous quarter, on doubled turnover of £14.6m.

Freeserve also said it was rolling out an Internet television portal. This will be pre-set on Bush televisions and set-top boxes sold through electrical shops owned by Freeserve parent Dixons and would be available on digital broadcaster ONdigital's Internet TV service, ONnet.

The company also said that cheaper access to local phone lines promised by BT (quote: BT), the former state monopoly that still controls them, meant Freeserve would soon be able to make a small profit, rather current loss, on unmetered access.

Freeserve has seen an average of some 310 million minutes of use a week so far in the second quarter -- which meant users were surfing for around 22 minutes a day, almost half as much again as they were this time last year.

Encouraging consumers to stay glued to their computer screens for longer is a key goal of many Internet companies which hope surfing will translate into shopping or reading adverts.

"Unmetered will help, but at what cost?" said analyst Slowinski. "We were very concerned with spiralling expenses."

In August, Freeserve -- which revolutionised UK Net access two years ago by ditching monthly subscription fees and charging only for local phone calls -- had 186.2 million page impressions, up from 151.5m in May.

It has also launched its own broadband Internet service.

The finance director said unmetered access has suffered a few glitches due to heavy demand but that newly installed extra capacity should put an end to that.

Reuters contributed to this report.

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