Swisscom said on Wednesday (Feb 28) it was in exclusive talks to buy all of Vodafone Italia for US$8.7 billion and would merge the business with its Italian subsidiary Fastweb.

The proposed purchase would be in cash and on a debt-free basis, the Swiss telecoms provider said in a statement.

Shares in Vodafone rose 1.7 per cent in early trading, while Swisscom was broadly flat.

Vodafone last month rejected an offer from French telecom operator Iliad to combine the two companies’ operations in Italy in a 50:50 joint venture under which the British group would have received 6.6 billion euros (S$9.6 billion) in cash.

Reuters reported this month that Swisscom was the only remaining party in talks with Vodafone.

Vodafone said in a statement it believed the Swisscom deal, which would see it exit its third-largest market, delivered the “best combination of value creation, upfront cash proceeds and transaction certainty”.

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Swisscom said the deal would boost its cash flow and would have “a positive impact on its dividend policy”.

If agreed, the deal would cap a busy first year for Vodafone chief executive Margherita Della Valle and achieve her aim of tackling the group’s three problematic markets.

She has already agreed to sell the company’s Spanish operation and merge its British arm with Hutchison’s Three.

Italy accounts for 11 per cent of Vodafone’s group service revenue, its third-largest market after Germany and Britain, according to a trading update this month.

The deal will create Italy’s second-largest fixed-line broadband operator behind TIM, with a strong presence in the prized business segment.

Analysts say it would also face lower regulatory hurdles than a combination with Iliad but lower potential synergies.

Swiss investment company Vontobel said the deal would create a strong contender in the most “challenging telco market in Europe”.

But it added that given the debt burden and integration efforts, a positive impact on Swisscom’s dividend policy was unlikely in the near-term. REUTERS