Freeserve, the UK's largest internet service provider, could fall into French hands for less than £2bn after confirmation yesterday that it was in talks which could lead to a takeover offer.
Freeserve - 80% owned by the retailer Dixons - refused to name the parties with which it was in discussions but France Telecom subsidiary Wanadoo said Freeserve was one of the companies it had its eye on.
If a deal were reached with Wanadoo or any other buyer, Freeserve admitted it would be forced to accept a relatively low offer compared to expectations only a few months ago.
A formal statement said: "The board has entered into discussions which may or may not lead to an offer being made for the company in shares. On the basis of yesterday's share prices it is unlikely that any such offer would be at a substantial premium to Freeserve's share price."
Overnight speculation about a pending deal pushed Freeserve shares 13% higher to 165p but they ended the day up a mere 2.75p at 148.75p, still lower than their July 1999 float price.
This level compares with a year high of 977p before the slide in technology stocks. Company sources said Freeserve would probably accept a 20-25% premium on the current share price to cement a deal.
Freeserve broke off similar talks with T-Online, a subsidiary of Deutsche Telekom, in June amid speculation the Germans would be willing to pay £6bn.
France Telecom admitted it was studying "a large number of opportunities" and admitted Freeserve was one of the companies in which it was interested.
Dixons declined to comment on talks but sources said Wanadoo was only one of a number of interested parties which were in discussion with Freeserve.
A deal between Wanadoo and Freeserve would double the size of each firm's subscriber base to a total of nearly 4m.
Freeserve provides free internet access as well as a range of services via its web portal. Wanadoo, France's biggest ISP, sells books, wine and other goods on the web.
Both companies have failed so far to expand successfully beyond their national boundaries and both have recognised they need large-scale investment to compete in new areas such as mobile phone access and instant messaging.
In the three months to August Freeserve produced £14.6m worth of turnover but made pre-tax losses of a similar size. Wanadoo floated on the Paris stock market four months ago.
New of the talks between Freeserve and Wanadoo sent a shockwave through Energis investors who feared their company - part-owned by the National Grid - could lose important telecom contracts if Freeserve were bought.
Energis shares fell 50.5p to 440.5p as the City worried that Wanadoo would want to switch some of the Freeserve traffic from Energis to NTL, with which it has a closer relationship.
Energis moved to calm fears that it might lose any business. "There should be no concerns - there is a contract in place between Energis and Freeserve," a company spokesman said. He refused to give details, but analyst Saeed Baradar of Bear Stearns said Energis told him it had a five-year deal until October 2003 to carry Freeserve's traffic.
Meanwhile, Freeserve announced an exclusive deal to start a co-branded website with Kodak to provide online picture processing plus online storage of digital pictures.
