Speculation over takeover bid drives Freeserve 10% higher

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The Independent Online

The share price of Freeserve staged a dramatic 10 per cent rebound yesterday as day traders bet that T-Online, the internet group controlled by Deutsche Telekom, was preparing to bid for the UK's largest internet service provider.

Banking sources, however, questioned whether T-Online, which is Europe's largest ISP, would move now to bid for Freeserve. The UK ISP's market capitalisation of £4.1bn, while more than double its flotation value, is less than half its early March peak when the stock hit 921p. Freeserve yesterday closed up 37p at 397p.

"The longer it takes (for a deal to emerge) the less Freeserve is worth," said a banking source. "It's tied to the UK and there are question marks about Dixon's commitment to future funding." Dixons, the high street electrical retailer, holds 80 per cent of Freeserve. Dixons shares added 2.6 per cent to 270p.

T-Online, which floated a fortnight ago with Deutsche Telekom maintaining a majority stake, has a market capitalisation of 51bn euros (£30bn) and around 5 million registered users. T-Online's prospectus indicated it would move quickly to expand beyond Germany. Aside from building the company's presence in Europe, Deutsche Telekom is thought to be considering ways of entering the US market where internet penetration is nearly triple UK levels and five times German levels.

The share price of T-Online continued to climb yesterday, adding 5.8 euros to 46.8 euros. That puts the stock up 64 per cent from its floatation, although still slightly below the original 50 euro price envisaged when the offer was being planned.

Freeserve, which has almost 2 million users, has engineered a slight increase in market share in the past year, but still faces daunting competition from Yahoo! and AOL as well as Microsoft.

Neither Freeserve nor T-Online were available to comment last night.