Vodafone's Indian unit in merger talks

Vodafone India store Image copyright Getty Images

Vodafone has said its Indian business is holding talks about a major merger which would create the country's largest telecoms firm.

It said Vodafone India, the country's second biggest mobile operator, was in negotiations with Idea Cellular, India's third largest network.

There was "no certainty" a deal would be agreed, Vodafone added.

Shares in the UK telecoms giant rose about 3% on Monday, making it the biggest riser on the FTSE 100 index.

Intense competition

India's leading mobile networks are embroiled in what analysts have described as "a vicious price war", started by the arrival of a low-cost rival offering free voice and data to customers.

Vodafone India and Idea Cellular, together with current market leader Bharti Airtel, have been forced to cut prices by Reliance Jio, a new operator owned by the country's richest man, Mukesh Ambani.

Vodafone was forced to write down the value of its Indian business by 5bn euros (£4.3bn) in November amid the intense competition.

The firm has looked to spin off Vodafone India, but said at the time it would wait for the market to stabilise.

The merger talks with Idea suggest "Vodafone is taking the Indian tiger by the scruff", said Neil Wilson, an analyst at London brokers ETX Capital.

"India has become a trouble-spot for Vodafone, with losses there severely hurting the rest of the group," Mr Wilson said.

"Indeed a vicious price war in India means the group could post its first operating loss in 10 years in 2017. The Idea tie-up looks like a way to limit the casualties on either side.

"Something had to be done and this merger might be the way to strengthen Vodafone's hand in the Indian price war."

In its statement on Monday, Vodafone said a merger with Idea would enable it to take the India unit off its books and receive a dividend from the new business.

Shares in Idea Cellular, owned by the Aditya Birla Group, have surged 26% on confirmation of the merger talks.

More consolidation to come: Analysis by Sameer Hashmi, BBC Business Reporter, Mumbai

More than ten telecom operators are battling it out to attract the custom of India's one billion mobile phone users.

That has forced firms to keep tariffs low - significantly impacting their profitability.

And the entry of Reliance Jio last year - has made matters even worse.

You can't avoid its high profile advertising campaigns here - pushing introductory offers of free voice calls and internet to cost conscious consumers.

The deep pockets of Mukesh Ambani mean many expect rock bottom prices even in the long run, forcing rivals to slash their charges further if they want to stay in the game.

So even if this Vodafone-Ideal merger goes ahead, I doubt it'll be the last bit of consolidation we see.

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