It's a deal: Wanadoo makes Freeserve bid

UPDATE: After months of speculation, a deal is finally on the cards for UK's pioneering ISP

Freeserve (quote: FRE) announced Wednesday it has received an offer for a takeover from bankers Lehman Brothers on behalf of Wanadoo, France Telecom's Internet service provider. The all-share deal would exchange .225 new Wanadoo shares for each Freeserve share, valuing the shares at 157p each, for a total value of £1.65bn. That is a slight premium over the current value of Freeserve shares, which closed Tuesday at 1.41p.

The offer caps off much speculation that the companies were negotiating a deal. Freeserve shares were suspended Wednesday ahead of the announcement.

The deal is likely to be approved. Dixons, which owns 80 percent of Freeserve, has bound itself to accept the offer, pending Dixons shareholder approval. Freeserve's board of directors have similarly bound themselves with an irrevocable undertaking, leaving only Freeserve's private shareholders to approve the deal.

Dixons plans to hold an exceptional shareholder meeting 11 January to address the Wanadoo offer.

France's Wanadoo said last month it was eyeing the UK Internet service provider (ISP) as a target for a takeover which would create one of Europe's top three ISPs.

Shares in Dixons (quote: DXNS), the electrical retailer which still owns four fifths of Freeserve, rose as much as 19p to 270p in the first hour of trading Wednesday.

Shares in Wanadoo, 88 percent owned by France Telecom, closed on Tuesday at 11.40 euros on the Euronext bourse in Paris.

Freeserve, which pioneered UK Internet access for just the price of a phone call in 1998, was in talks earlier this year with Germany's T-Online -- with a rumoured price tag of £6bn -- but these broke down in June.

Its shares, rising and falling with takeover speculation, have since slipped to an all-time low of 128-3/4p, below its 150p flotation in July 1999 and far from this year's 977-1/2p high which valued it at £10bn.

Analysts say that despite being Britain's biggest Internet service provider, the company lacks scale to compete in a consolidating European market. It could benefit from a tie-up to get access to the money needed to develop new services as the Internet market moves towards super-fast broadband connections and the mobile Net.

Wanadoo, with 1.8 million users to Freeserve's two million, has the cash that Freeserve lacks. Freeserve's first quarter revenues were £14.6m but its operating loss was the same amount. It only has cash to last it a year at that rate -- whereas Wanadoo has almost 2bn euros at its disposal.

Freeserve is worth £750 for each subscriber -- making it Europe's cheapest major ISP by this measure but still far dearer than US rivals except for AOL, which actually makes money from users.

Wanadoo's market value of over 14bn euros puts a far higher price of more than 8,000 euros on each of its users' heads -- making it Europe's dearest.

Both Italian ISP Tiscaliand British cable TV operator ntl -- itself part-owned by France Telecom -- were also rumoured to be interested in Freeserve during half a year of takeover speculation.

This was sparked in the spring and compounded when Freeserve chief executive John Pluthero said in May the company was considering whether it had the scale to go it alone.

Its original business model, of making money from a share of phone-call revenue, has looked increasingly shaky as call costs have fallen and the market moved towards flat-rate monthly fees including unlimited Internet access.

These unmetered packages have actually been losing Freeserve money, though a new deal announced last week with its telecoms partner Energis (quote: EGS) will actually make profit.

Freeserve is facing tough competition in this flat rate market from AOL UK, which has one million UK users.

Reuters contributed to this report.

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