NEW DELHI: The biggest consolidation in India’s telecom sector is officially underway with UK’s Vodafone Group Plc and the KM Birla-owned Idea Cellular confirming they are in initial talks to merge their businesses in a cashless deal which could create the country’s largest mobile phone operator by subscribers and revenue market share.While the two companies did not give any details, the statements issued by the two parties suggest that Birla wants equal rights and that Vodafone will hold 50% or less in the merged entity. Vodafone will be issued fresh shares of Idea, which will continue to be listed.If the merger between India’s No 2 and No 3 telcos materialises, the combined entity will knock off Bharti Airtel from the top slot for the first time in over 15 years and with its scale, size and synergies, present a strong response to Reliance Jio’s formidable challenge.The merger will result in the Indian telecom landscape being dominated by three strong private firms along with the state-owned BSNL.It will possibly begin the process of renewing price discipline in an industry which has been shaken up by Reliance Jio’s disruptive entry.Investors were quick to cheer the development with Idea Cellular’s scrip shooting up by 26%, its highest single-day rise, on BSE to close at Rs 97.95 on Monday.Shares of the two other listed phone companies — Bharti Airtel and Reliance Communications — rose by 7.5% and 11.5%, respectively. Vodafone PLC’s shares, too, went up by 2.95%, as of press time, on the London Stock Exchange.In response to a query by the stock exchanges about a news story headlined ‘Merger May be the Best Idea for Vodafone, Sirji’ published in ETon January 30, Idea Cellular on Monday afternoon confirmed that it was in preliminary discussions with Vodafone and said the premise of the discussions was that the Aditya Birla Group and the UK-based company will have equal rights in the combined entity.A few hours earlier, Vodafone said it was in discussions with the Aditya Birla Group about an all-share merger of Vodafone India and Idea. “Any merger would be effected through the issue of new shares in Idea to Vodafone and would result in Vodafone deconsolidating Vodafone India,” said the company statement.Both companies cautioned that talks were at a preliminary stage and there was no guarantee that they would result in a merger.If the discussions are successful, Vodafone, which has been embroiled in a multi-billion-dollar tax dispute for the past many years, will buy into Idea through a share swap, but will keep its stake at 50% or below in the combined entity. This will result in its Indian business ceasing to be a subsidiary of Vodafone Group Plc which then won’t have to consolidate its Indian unit’s numbers, including debt and losses, into its own financials. Vodafone India has a debt burden of over Rs 34,000 crore and its losses have widened in the first half of the current fiscal.In terms of subscribers and revenue, Vodafone India is bigger than Idea Cellular and a merger should result in its parent company holding a bigger stake. A top industry executive, who did not wish to be named, said if Vodafone PLC was to hold 50% or less in the merged entity and if the Birlas were to hold equal rights, it’s possible that another investor would be inducted into the company.This investor could buy a portion of Vodafone PLC’s stake and also infuse fresh capital into the company. But this could not be confirmed.If the merger happens, it will create a formidable entity. The combine will have a 43% revenue market share and over 390 million subscribers, in comparison to Bharti Airtel’s 33% market share and 266 million subscribers.As of March 31, 2016, the combined Idea-Vodafone revenues were Rs 80,400 crore. While this was less than Bharti Airtel’s consolidate revenues of Rs 96,532 crore, it was more than its India revenues of Rs 70,843 crore.The merger will also result in Vodafone, which has been thinking and talking for years about an IPO for its Indian arm, finally being able to create a tradable market value for its Indian operations. Idea, in which Malaysia’s Axiata owns around 20%, has a market capitalisation of over Rs 35,000 crore.On the flip side, the combined entity will have a debt of Rs 72,000 crore. Industry executives and experts said a possible stumbling point in the negotiations could be regarding who controls the new entity with both Vodafone, with a larger balance sheet, and Idea, with a more efficient and faster growing operations, staking claim for the same.“The merged Vodafone-Idea entity could well be a jointly-controlled enterprise (much like Indus Towers) in which no single company will own a majority stake (above 50%). Both Vodafone and Idea are likely to hold sizeable but equal stakes (read: upwards of 40%) in the merged entity,” said an industry official.The merger move comes at a time of a brutal price war in India’s telecom industry triggered by the entry of Reliance Jio in early September which has already hit Bharti Airtel’s profits and is poised to hit Idea as well. The telco is expected post its first ever net loss in the quarter ended December.“Pain is inevitable. There is no point hiding that,” said Idea Cellular managing director Himanshu Kapania. “We are going through a predatory pricing regime. We are receiving a tsunami of calls coming in because of incoming volume of free calls,” Kapania added.Vodafone India’s financial woes have also been exacerbated by the bruising impact of Jio’s free voice and data services.The company had last November said it had written down the value of Indian business by EUR5 billion, due to increased competition sparked by Jio’s entry.“The deconsolidation of India would reduce its (Vodafone Group’s) subscriber base by about 40% and reduce its revenue growth rate somewhat, but would likely somewhat increase its EBITDA margin, as its Indian operations are likely to fall below the company average with pressure from Reliance Jio, or RJio,” brokerage Morningstar said in a report. “We like the idea of the merger, as we believe there are far too many operators in India, which has prevented good returns,” it said.“The firm’s subscriber growth has long exceeded our projections, but it has struggled to translate that growth into earnings and cash flow.”Analysts added that the industry could benefit from the reduced competition. “We believe that a potential Idea/Vodafone merger could make strategic sense — move to No. 1market share — with 43% revenue share and 28% spectrum share — scale/synergy benefits, and complementary footprint with Vodafone strong in urban areas and Idea strong in rural areas,” analysts at Bank of America Merrill Lynch said.On the downside, the post-merger combined entity could face practical implementation issues, most importantly an estimated cost of Rs 20-30 billion (over Rs 13,300 crore) associated with liberalising the spectrum, which would go to the government.The combined entity would also breach spectrum caps in five circles, the market value of which comes to Rs 7,500 crore, and some spectrum would have to be returned, analysts at Bank of America Merrill Lynch added.