French internet service provider Liberty Surf, which is part owned by the UK's Kingfisher group, confirmed yesterday that it is in talks with several potential partners.
Speculation is centred on Belgium's state-controlled telecoms group, Belgacom, which is known to be keen to expand its internet operations in France, where it is already represented by Infosources.
Speculation about the possibility of a Belgacom bid allowed Liberty Surf shares to shrug off the general malaise affecting hi-tech stocks and close almost 9% higher on the day.
Liberty Surf yesterday refused to be drawn on the identities of the companies with which it was holding talks or the prospects of an alliance materialising.
"Following media reports referring to talks with a telecoms group, Liberty Surf would indicate that, while talks are going on with different partners, they could either reach or not reach a conclusion," the company said in a statement.
Belgacom - where the government has a 50% plus one share - is seen by industry analysts as a good partner for Liberty Surf at a time of consolidation among internet service providers.
Liberty Surf has said it would make sense for it to join forces with either a media or a telecoms company. A tie up with Infosources - which is 75% owned by Belgacom - would increase Infosources' presence in France, which accounts for a third of its active users.
Liberty Surf has some 730,000 users - including 600,000 in France.
One problem for Belgacom would be the way in which a deal would have to be financed. Liberty Surf has a market capitalisation of around €550m (£347m) and the Belgian telecoms group would almost certainly have to pay cash to fund a deal to combine the two sets of internet activities.
It would be difficult for it to use its own shares because it does not have a stock market quotation so valuation would be a problem. Even if that could be overcome, any new share issue would mean the Belgian government surrendering control - a position it is thought to have accepted in principle but where the practicalities have not been decided.
Belgacom could finance a deal by using shares in Infosources, which it bought back in December, but as Liberty Surf has a much larger market capitalisation than Info-sources that would mean it would have to surrender overall control. Yesterday Info-sources shares were down 18% on concerns about the extent of possible dilution for a deal with Liberty Surf.
"From an industrial point of view, such a deal [between Liberty Surf and Belgacom] would make sense but it does beg the questions about financing," David Cerdan, sector specialist at HSBC-CCF said.
Kingfisher, which has around 35% of Liberty Surf shares - the French group's other big shareholder is Bernard Arnault's Groupe Arnault - declined to comment on the day's developments.
