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Unique Vodafone and Iliad in talks to merge Italian entities – sources

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©Reuters. FILE PHOTO: Branding for Vodafone is seen on the outside of a store in London, Britain September 10, 2015. REUTERS/Toby Melville/File Photo

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By Pamela Barbaglia and Elvira Pollina

LONDON (Reuters) – Telecoms firms Vodafone (NASDAQ:) and Iliad are in talks over a deal in Italy that would combine their respective companies to end cutthroat competition in the euro zone's third-largest economy, sources familiar with the matter said Reuters.

Discussions between the two companies are ongoing and both parties are actively exploring ways to bring about a merger of their respective companies in Italy, the sources said on condition of anonymity.

Iliad, which will make its fixed-line broadband debut in Italy on January 25, is working with investment bank Lazard (NYSE:) on its strategic plans in Italy, one of the sources said, warning a deal is not certain.

If successful, a deal would create a telecoms powerhouse with about 36% mobile market penetration and combined sales of nearly €6 billion ($6.80 billion).

Iliad and Vodafone both declined to comment, while Lazard was not immediately available for comment.

Iliad, led by billionaire founder Xavier Niel, has been exploring options for further expansion in Italy in recent months, looking to use deal fever in Italy's telecoms industry to accelerate consolidation and end a price war that's eroding its margins has said sources.

The talks come as incumbents Telecom Italy (MI:) is still reviewing a €10.8 billion ($12.25 billion) takeover approach from US fund KKR that aims to privatize Italy's largest phone company.

Niel, who founded Iliad in 1990 and sits on KKR's board as independent CEO, aims to become a kingmaker in the fragmented Italian telecoms market, where he unleashed an aggressive price war in 2018 when Iliad made its first foray into Italy.

Industry executives have repeatedly pushed to seek four to three telecom mergers that could unlock cost synergies and increase margins by reducing the existing number of mobile operators in Italy, namely TIM, Vodafone, WindTre and Iliad.

Iliad's Italy boss Benedetto Levi said on January 13 that the French firm was ready to buy a competing operator.

"When a company becomes available on the market in whole or in part, we will examine it without prejudice," he told the financial newspaper Il Sole 24 Ore.

Earlier on November 17, Vodafone boss Nick Read said consolidation was needed in Europe, particularly in Italy, Spain and Portugal, where "all players are suffering".

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Vodafone has annual sales of about €5 billion in Italy and a 28.5% penetration of mobile customers, according to the Italian communications regulator AGCOM.

Iliad is instead much smaller, with its Italian unit reporting annual sales of €674 million in 2020 and a mobile market share of about 7.7%, according to AGCOM. But the company has fared well during the pandemic, with third-quarter sales up 21% to €207 million in 2021.

Any link between the two companies would need blessings from both Rome – which sees the country's telecoms infrastructure as an asset of strategic interest – and European antitrust authorities, which have ruled against previous merger attempts in Europe, including Three's acquisition of Britain's O2 2016, one of the sources said.

Iliad itself was allowed to enter Italy as part of the fix package that Vimpelcom and Hutchison negotiated with European regulators to merge their Italian mobile operations in 2016 without changing the number of existing players.

Last year, Niel made a €3.1 billion bid for full control of Iliad and subsequently delisted the company from the Paris Stock Exchange, signaling his intention to make the group a "leading telecoms company in Europe".

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