Reliance Communications and Aircel have begun talks to combine their wireless telecom operations to create India's second largest mobile operator as intensifying competition fuels consolidation in a crowded market.
The Reliance mobile phone business is India's fourth-biggest by customer numbers while Aircel ranks fifth. The combined business would surpass Vodafone's Indian operation as number two in the sector.
India's telecoms market is the world's second-biggest behind China in terms of mobile phone subscriptions, but tough competition means low margins for the 10 carriers.
Reliance Communications, controlled by billionaire Anil Ambani, has entered a 90-day exclusivity period for the talks with Aircel, it said on Tuesday. Financial details of the proposed transaction have not been disclosed.
In the first sign of sector consolidation, Reliance Communications last month agreed to buy Russian conglomerate Sistema's Indian mobile phone business in an all-stock deal.
This month it agreed to sell its tower business to a group including TPG Capital Management LP to cut a heavy debt load. The Aircel talks exclude those assets.
Reliance Jio, a telecoms business controlled by Anil Ambani's elder brother and India's richest man Mukesh Ambani, is preparing to launch the nation's biggest 4G network, which will only add to competition.
Reliance Communications has a pact with Reliance Jio to share some airwaves. A deal with Aircel, majority owned by Malaysia's Maxis Communications, will expand its access to 3G airwaves and add 4G capacity to its portfolio.
Amresh Nandan, a research director at Gartner, said increasing competition will make life difficult for bottom four or five telecoms carriers, adding more such deals could be expected next year.
Bharti Airtel Ltd is the current market leader.
Reliance Communications' India operations that include its wireless business accounted for 82% of its revenue of about 47 billion Indian rupees ($710 million) for the three months to September.
If the Aircel deal goes through, Reliance Communications shareholders will receive free shares in the new combined wireless entity, said a source with direct knowledge of the matter. Reliance Communications will continue to own its enterprise and undersea cable businesses, the source said.
With a debt of about $6 billion, Reliance Communications is the most leveraged among listed Indian carriers. Unlisted Aircel is also battling a heavy debt burden, which rating agency ICRA said was about 185 billion rupees ($2.8 billion) as of 2013.