Broadband provider United Internet AG (UTDI.XE) Tuesday said it had acquired Freenet AG's (FNT.XE) broadband operations for a much-lower-than-expected EUR123 million.

United Internet is expected to pay part-cash, part-shares to buy about 700,000 customers for Freenet's digital subscriber line, or DSL, service, although it retains the option to pay entirely in cash.

It will also set up a sales partnership with Freenet.

The deal, the latest in the lengthy consolidation process in European broadband, shows a steep decline in valuations: Only in February, analysts estimated Freenet's DSL operations were worth about EUR300 million.

Carphone Warehouse Group PLC (CPW.LN) earlier this month became the U.K.'s second-biggest broadband player, after clinching a deal to buy the U.K. assets of Italian Internet service provider Tiscali SpA (TIS.MI) with its 1.45 million customers, for GBP236 million.

"Our deal and the Carphone Warehouse/Tiscali deal have more or less the same valuation - and could be used as a benchmark for other deals," United Internet's Chief Executive Ralph Dommermuth told Dow Jones Newswires.

Sal. Oppenheim's Marcus Sandler said United was paying about EUR175 per DSL customer, which he considers relatively cheap. He sees the deal structure as favorable for United, adding that it's good for Freenet to finally clinch a deal.

Sandler rates United stock at buy with a fair value of EUR10 and also has a buy recommendation for Freenet, with its fair value under review.

At 1050 GMT, United shares were up 6.9% at EUR8.05 while Freenet had gained 1.3% to EUR5.51 - both outperforming a weak overall market.

CEO Dommermuth said that no capital measures, such as a capital increase or placement of shares, are planned to finance the deal. He added that United was only buying the customer contracts, not infrastructure or manpower, so the move should increase the profitability of its DSL operations.

Freenet's DSL operations have been up for sale since last summer, and Dommermuth said that only last year his company was willing to pay EUR1 billion. But, after a change in Freenet's management, it carried out due diligence and lowered its potential offer.

United plans to enter a long-term sales partnership, making it a preferred supplier of DSL services sold in Freenet's outlets throughout Germany. It aims to gain 500,000 new DSL customers within the next five years under this sales partnership.

As of March 31, United Internet had 2.82 million DSL customers.

CEO Dommermuth declined to comment if the company is interested in acquiring Telecom Italia SpA's (TI) German broadband unit Hansenet, in which Vodafone PLC (VOD) and Telefonica SA (TEF) have already expressed interest. Hansenet had 2.34 million broadband customers as of end-2008 in Germany, and is worth more than EUR1 billion, according to analysts' estimates.

United said it expects its DSL customer base to be flat in 2009 excluding the Freenet transaction. The deal is subject to regulatory and other approvals.

Company Web site: http://www.united-internet.de

-By Archibald Preuschat, Dow Jones Newswires, +49 211 138 7218, archibald.preuschat@dowjones.com

(Joerg Jaeger in Frankfurt contributed to this item.)
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