Back in August and October last year, we drew attention to the ailing business model of freenet AG and the drastic reduction in shareholder value arising from resistance to attempts at consolidation initiated, amongst others, by United Internet and Telefónica. After the departure of former freenet CEO Spoerr from the board in December last year, it appears that attempts are being being made to feather freenet’s nest. Consequently, there was an announcement this morning on the news ticker that an agreement has been concluded between the United Internet subsidiary 1&1 and freenet AG regarding the purchase of freenet DSL as well as an agreement concerning medium-term collaboration in the marketing of DSL products. The sale is being effected by means of the acquisition of all shares in freenet Breitband GmbH.

In the context of this acquisition, 1&1 Internet AG is buying all freenet DSL and freenet full contracts outright. Customers served by affiliated companies or by wholesale partners of freenet will remain with freenet. According to press releases, the purchase price will amount to approximately € 123 million, consisting of € 70 million to be paid in cash and 4,583,500 United Internet shares. The purchase price, the majority of which will be due after arrangements have been made for the transfer of customers, is based on a valuation of the customer base and is therefore dependent on the number of customer contracts to be transferred. The aim is to transfer the customer contracts technically by the end of 2009. It is estimated that, at the time of the migration, approximately 700,000 DSL contracts will be transferred to 1&1. Further, as part of the terms of a marketing agreement applicable until at least 2014, a premium for additional contracts has been agreed equating to up to 6,551,000 United Internet shares.

As it is anticipated that by the time the technical migration takes effect about 700,000 DSL contracts will have been transferred, the price of approximately €175 per customer that United Internet is offering for every freenet DSL customer is very considerable indeed. Furthermore, it is not yet clear what strategy will be pursued by the remaining business operations of freenet AG. However, we assume that it will involve a strategy of divestiture and ‘asset stripping’ and that the remaining parts will be offered for sale to other companies in the medium-term.

Comment by Jens Meyer, 26th May 2009