France Télécom SA's ISP subsidiary, Wanadoo SA has snapped up the UK's largest ISP Freeserve in an all-stock deal valued at 157p per share, or approximately £1.65 billion.

The offer by Wanadoo has already been recommended by the boards of Freeserve and its parent company, retail giant Dixons. "The board has approved the deal unanimously and it is irrevocable on a personal level," said John Clare, CEO of Dixons Group.

The merger will make the combined ISP the second largest in Europe behind T-Online International AG, the internet subsidiary of Deutsche Telekom, in terms of active subscribers, with 4.05 million, and Europe's fourth largest portal with 9.34 million unique visitors per month, said Nicolas Dufourcq, chairman and CEO of Wanadoo.

As part of the agreement, 0.225 Wanadoo shares will be traded for each share of Freeserve, based on the 5 December closing stock price of Wanadoo shares, said Wilfriend Verstraete, chief financial officer of Wanadoo.

Pending final approval of the deal, which is expected in January, Wanadoo will issue up to 236.4 million new shares of Wanadoo, Verstraete said.

Of the 1.43 billion shares of Freeserve, Wanadoo will hold 74 percent and Dixons will own 12.7 percent. Under the terms of the agreement, Dixons will be allowed, should it choose, to immediately sell up to 20 percent of its remaining shares in Freeserve, with the other 80 percent becoming unlocked in six month increments until 2004.

"Though we will cash in some shares, we will stay a (Freeserve) shareholder for some time, and maybe a very significant length of time. We feel that behind this partnership sits France Télécom and Dixons," Clare said.

Freeserve and Wanadoo already have a common vision and will share technology, distribution, expertise and content in an effort of eliminate any duplication of effort, Wanadoo's Dufourcq said. "We are very similar, it is like mirroring each other in the same mirror. I think that together we can give some pain to the competitors," Dufourcq said.

The deal ends months of speculation about Freeserve's future. Last June, Freeserve confirmed it had talked with Germany's T-Online International AG, among other potential suitors, and a merger seemed possible as late as July, though talks eventually broke off.

Last month, Freeserve confirmed that it was in talks with an unidentified company that wanted to buy the ISP in a stock deal. Though Freeserve at the time would not name the possible partner, Wanadoo independently confirmed it was looking into the possibility of buying Freeserve from its parent company, Dixons.

"We have spoken to a lot of companies in this space. I think that a cash deal, which is pretty unusual among Internet players, was pretty much ruled out by most players. I do not think we could have gotten a better deal," said John Pluthero, CEO of Freeserve.

France Télécom already owns London-based mobile phone operator Orange PLC after buying the company in a 26.9 billion pound merger in May and owns about 22 percent of the UK-based communications group NTL.

"It will be very interesting to see how they are going to combine those unique services," said Ariane Afrough, senior research analyst for market researcher IDC.

Wanadoo's Dufourcq also mentioned the future possibilities between Freeserve, Orange and NTL saying that they would all work together to make sure any duplication of efforts, be it in research and development or expansion of services, were not duplicated. "We are working on building a leading European online services and new media company," Dufourcq said.

"It was a good deal for Wanadoo because they've just added a massive market to their portfolio. It also shows where the market is going - towards Pan-European companies. Companies will have to continue to consolidate and offer services across Europe," Afrough said.

According to Afrough, the deal is also a good one for Freeserve, mainly because since it is an ISP serving the UK it would only have become a target for a takeover as bigger companies continued to consolidate.

"I don't think that Freeserve could have gotten any more money from T-Online, than it did from Wanadoo," Afrough said.

For the time being though, Afrough believes that T-Online will continue to hold the number-one position in Europe simply because the German market is so big.

"There is still a lot of potential for T-Online. They might try to acquire other companies, small regional ones, and focus on the central European market and a little more on the eastern European market," Afrough said.