Last May, Dixons Group, a British electronics retailer and a major Freeserve shareholder, said it was considering selling its stake in Freeserve. The company and Dixons then talked with several potential suitors, including T-Online, about a possible deal.
But yesterday, Freeserve issued a statement saying that no sale is imminent.
"Whilst certain discussions continue, Freeserve does not expect that this process will lead in the near future to a bid for the whole of Freeserve," said the company, which offers free Internet access.
As a result, Peter Misek, an analyst with Chase H&Q, downgraded the stock to "market perform" from "buy." Lehman Brothers also downgraded the shares to "outperform" from "buy."
"Everyone expected them to make a merger announcement this week, but something happened over the weekend," Misek said. "We downgraded the stock because the company's shell-shocked, and it will take time to find another bidder. The banks had not organized a backup bidder."
He noted that although France Telecom may eventually emerge as a suitor, Freeserve's comments were "not encouraging."
Freeserve, which had a market cap of $6.8 billion prior to its announcement, was expected to fetch $10 billion from T-Online, Misek said.
Consolidation in the Internet service provider (ISP) and Internet media industries is expected to sweep through Europe through the rest of this year, as the region changes its telephone billing system and as international advertisers seek larger outlets.
With Europe operating under a unified currency, companies may look to advertise on Web sites that serve the whole region, rather than sites that cover just Germany, France or the United Kingdom, Misek said. He added that consolidation also gradually extinguishes costs such as for hosting Web sites and for setting up infrastructure for a larger audience.
The shift in the way phone calls are billed is another area of concern for free ISPs in Europe. Besides advertising and e-commerce, free ISPs derive revenues by taking a cut of the per-minute charges levied by phone companies for Net access. But phone companies are moving toward a flat-rate monthly billing system similar to that in the United States for local calls.
Freeserve receives about 50 percent of its revenues from these per-minute charges, a ratio that is expected to decline as customers move to flat-rate pricing.