The talks with Idea are through its controlling company Aditya Birla Group and could lead to a split by Vodafone of its business in India into a completely separate entity, said the telecommunication giant on Monday.
Idea shares increased 29% on the news, the most its shares have increased since they started trading a decade ago, bringing the market value of the company to over $5 billion.
Vodafone gained 4.1% after news leaked of the ongoing negotiations.
The deal for all stock would lower the exposure of Vodafone to its troubled asset, which was forced to inject over $7 billion into it and write down the value of the business by over $5 billion.
Carriers operating in India have been seeking consolidation after Reliance Jio Infocom controlled by Mukesh Ambani a billionaire and the richest man in India, introduced free services that undermined revenue across the industry.
One analyst in Europe said on Monday that India needs more consolidation as there are far too many companies in operation and that has prevented any from every earning the type of money they all had hoped for.
India’s growth rate is higher and it has always succeeded at adding new subscribers, but it has not done a good job at transferring that to the bottom line.
A successful merger would unite No. 2 with No. 3 in India and make an operator that has over 387 million subscribers, or 36% of the complete market share as well as airwaves. In addition, it would make for faster 4G services that would span the entire country.
In addition, Vodafone would gain a listing in the country, which it has considered since 2011. Vodafone announced that the deal would not include its stake of 42% in Indus Towers.
Possible risks to this deal include breaching spectrum limits that would force the new entity to sell off very valuable airwaves. The new entity would have debt of nearly $10.6 billion based upon its reported borrowings.
Prior to the entry of Airtel, owned by Jio, Vodafone and Idea increased their revenue as well as profit even as they were borrowing in large sums to pay for their infrastructure and spectrum.
Jio created a bang in the crowded cellular market with its free voice calls and spurred its rivals to lower prices and expand their networks of mobile broadband.
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