MUMBAI -- British telecom company Vodafone's Indian unit is negotiating an all-share merger with the Aditya Birla Group-led Idea Cellular, in a move that would not only change the industry pecking order but also help the duo fend off rising rival Reliance Jio Infocomm.
In a statement on Monday, Vodafone confirmed that discussions are taking place, adding that the deal would exclude its 42% stake in Indus Towers.
"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, cautioning, "There is no certainty that any transaction will be agreed, nor as to the terms or timing of any transaction."
Idea Cellular, too, confirmed the talks in response to stock exchange requests for clarification. The company said the discussions are in the preliminary stages.
The news sent shares in Idea Cellular soaring 24.23% on the Bombay Stock Exchange, to 96.90 rupees, while Vodafone was trading 3.03% higher on the London Stock Exchange, at 199.20 pounds.
The combined company would boast some 800 billion rupees ($11.76 billion) worth of revenue, compared with market leader Bharti Airtel's more than 900 billion rupees.
An earlier note by brokerage CLSA said the combined entity would likely control 43% of the market by 2019, versus 33% for Bharti Airtel and 13% for Reliance Jio.
"The merger will help Vodafone India improve its position in the mass market, while Idea Cellular would gain from Vodafone's strength in the metro circles," CLSA said in the Jan. 19 note. "Finally, the merger would create a new leader in the mobile/data industry, challenging both Bharti Airtel and Reliance Jio."
Vodafone India counts more than 200 million domestic subscribers and is planning to provide fourth-generation, or 4G, services in 17 out of 22 telecom circles by March. Idea, with a similar base, is also moving closer to covering its entire circle network.
JP Morgan appears to be sold on the benefits of the merger. "This could unlock more than $9 billion in potential synergies and offer an elegant route to deconsolidating India, thereby helping focus [Vodafone's] attention back onto a rebounding European equity story," wire service IANS quoted the top investment bank as saying. Rumors about the proposed merger have been swirling for some time, and the industry is expected to see more realignment.
In December, Reliance Communications sought to pare its debt by selling a stake in its telecom tower business to Canada's Brookfield Infrastructure for $1.6 billion. The Canadian company is also said to be in talks with Bharti Infratel for a majority stake worth $5 billion, according to CNBC's local affiliate.
Pressure has been mounting on telecom companies since Reliance Industries' telecom arm emerged on the scene in September. Reliance Jio Infocomm is luring customers with free voice calls and ultralow data rates. In December, the company extended the free offer until March, and the word is that another extension is likely.
Rival telecom players have been slashing their own voice and data rates, both before and after Reliance Jio's big splash. The Indian government's surprise demonetization of high-value currency notes in November, and the ensuing cash crunch, has also hurt demand for prepaid recharge cards.