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Vodafone is in talks about a merger of its Indian operations with rival Idea Cellular, a deal that would create a mobile network with about 380m users and form one of the largest telecoms companies in the world.

The British mobile operator said on Monday that it was “in discussions” with Aditya Birla Group about an all-share deal.

Vodafone shares rose 2.5 per cent to 198.5p in early trading on hopes a deal would help counter competition from aggressive new market entrants. Shares in Idea Cellular increased 26 per cent following Indian press reports of a possible deal, valuing the company at Rs354.3bn ($5.2bn).

“Any merger would be effected through the issue of new shares in Idea to Vodafone and would result in Vodafone deconsolidating Vodafone India,” the company said. “There is no certainty that any transaction will be agreed, nor as to the terms or timing of any transaction.”

The Indian telecoms market has long been tipped for consolidation, with Vodafone seen as a likely buyer of assets. It had planned to float its Indian operation, which would have provided it with capital to make acquisitions as well as putting a value on its own local operation.

A merger with Idea, which is already listed, negates the need to pursue a merger in its own right. It is also likely to generate about €1bn in synergies, according to analysts.

The talks come in the wake of an explosive entry to India’s telecom sector by oil products group Reliance Industries, India’s second-largest listed company, whose Jio subsidiary has upended the industry’s pricing dynamics by offering its mobile services for free since its public launch in September. It has rapidly built a base of 70m customers.

Mukesh Ambani, Reliance’s chairman, has overseen investment of more than $25bn in Jio, in a move that prompted rivals to slash tariffs.

Analysts have predicted that Jio’s arrival will trigger a wave of consolidation in the sector. Aircel and Reliance Communications, controlled by Mr Ambani’s younger brother Anil, announced merger plans in September.

The proposed Vodafone-Idea deal would be, by far, the sector’s biggest to date, creating a company whose user base would eclipse that of the current market leader Bharti Airtel, which had 266m mobile customers at the end of December.

Jio’s impact came to light when Vodafone took a €6.3bn writedown in November to reflect its lower growth prospects.

Investors have long questioned whether Vodafone should cut its losses in India given the huge cost of building up the business and the recurring issues around tax. The havoc caused by Reliance Jio only heightened concerns that, despite growing its customer base healthily since it entered the Indian market in 2007, it has struggled to turn a net profit and has taken a number of hefty writedowns on the business.

The decision to merge with Idea and team up with the Birla family was seen in some quarters as a first step in Vodafone potentially exiting the market by selling down shares in the listed entity.

Dhananjay Mirchandani, an analyst with Bernstein, said Vodafone was “technically ceding control of its Indian operations” by forming the joint venture.

“That Reliance Jio’s entry and it’s hugely disruptive pricing move to rapidly build up scale would lead to consolidation was becoming increasingly obvious. Vodafone’s confirmation of talks with Idea fits that mould, although the speed at which this is unfolding is indeed surprising,” Mr Mirchandani said.

Talks with Idea will continue to resolve who retains management control of the enlarged unit and whether there would be any regulatory risks. The company will likely sell down pockets of spectrum in some regions to comply with laws about the ownership of airwaves, according to analysts, but that would also raise funds to sell down debt.

Vodafone’s 42 per cent holding in Indus Towers, a joint venture with Bharti and Idea, will not be included in the merger.

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