Freeserve, the UK's largest internet service provider, is being sold to the French based Wanadoo, in a £1.6bn deal which will create Europe's third largest internet service provider (ISP).
The move effectively nationalises Freeserve. The state owned France Telecom, which also operates the Orange mobile phone network, owns 88% of Wanadoo.
Dixons, which created and spun-off Freeserve, is backing the take-over, which will be paid for in Wanadoo stock rather than cash. The UK high street electrical retailer will own 12% of the merged company.
Wanadoo has a target of 10 million customers by 2003 and the merged organisation company aims to exploit an internet advertising market that is predicted to grow six fold by 2003.
It also wants to become Europe's second largest operator of web-based directories, which provide the majority of its revenues.
The merger will help Freeserve avoid a potential cash crisis. In September the ISP warned its cash burn would leave it out of funds within 12 months.