German raider eyes Freeserve

T-Online, the internet company owned by Deutsche Telecom, is considering bidding for Britain's Freeserve, a deal which would create one of the world's largest internet service providers.

It is understood that senior executives at the German company have been running the slide rule over Freeserve for the last week and are considering making a friendly approach.

A source close to the company said: "They have a declared intention to grow in Europe. I would be gob-smacked if they didn't have a punt." If merged, it would create a company with nearly 7m registered users.

T-Online, which has a market capitalisation of 425bn euros, is keen to take advantage of its highly rated paper and strengthen its already dominant position in Europe.

The company floated just 12 days ago at 28.5 euros has soared since closing at 41 euros on Friday. It is still some way off 50 euros, the offer price originally penned in by its bankers Goldman Sachs and Dresdner Kleinwort Benson. This figure was later revised after the series of tremors that hit the world's technology stocks.

On Friday, Freeserve, which is 80 per cent-owned by electrical retailer Dixons, closed at 360p, valuing it at £3.6bn. While it is dangerous to call any internet stock "cheap", Freeserve is some way off its March high of 921p, when technology stocks could do no wrong.

A bid for the company would be highly unlikely to push the price up to that level.

Deutsche Telecom created T-Online from scratch and plans to link it with its telecoms interests. In the UK, the company owns One2One, the fourth largest mobile telephone operator.

Last Thursday, it successfully bid for one of the next generation of mobile licences, which will beam the internet to hand-held devices. T-Online is understood to be keen to link its mobile service with an internet and content provider.

Freeserve would fit this bill perfectly. It is the largest UK internet service provider, with nearly two million customers. It is also rapidly developing internet content with financial, shopping and news services.

However, to get its hands on Freeserve, T-Online's chairman Wolfgang Keuntje would have to win around Dixon's chairman and ardent Eurosceptic Sir Stanley Kalms.

Despite persistent whispers that Dixons would offload its stake in Freeserve, Sir Stanley has always maintained it is a long-term investor.

Another option thought to have been considered by both companies is an alliance. But this would be unlikely to reap the same rewards as a full-blown merger.

Deutsche Telecom is also understood to be looking at the possibility of giving T-Online a presence in the US.