By John Revill and Paul Sandle
ZURICH/LONDON (Reuters) -Swisscom said on Friday it would buy Vodafone (NASDAQ:VOD) Italia for 8 billion euros ($8.7 billion) and merge the business with its Italian subsidiary Fastweb in the latest round of consolidation in Europe's most competitive telecoms markets.
The deal follows the merger of French mobile operator Orange's Spanish business with rival MasMovil, that was approved earlier this week, and Vodafone selling its Spanish unit to Zegona Communications last October.
Swiss government-controlled Swisscom said the all-cash deal would be debt financed.
Vodafone said it would return 4 billion euros of capital to shareholders and halve its dividend to 4.5 euro cents a share from its 2025 financial year onwards after the deals in Italy and Spain and the sale of its Spanish operation.
Its shares were 5.7% up in London while Swisscom gained 4.2% on the Zurich exchange at 1250 GMT.
Analysts at Berenberg said Swisscom was increasing its exposure to the highly competitive Italian market and diversifying further away from its safe-haven Swiss core.
But its signal of an 18% rise in its dividend for the 2025 financial year, payable in 2026, and increased growth boosted by cost synergies had "helped to take the sting out of the announcement", they added.
The Swisscom deal will create Italy's second-biggest fixed-line broadband operator behind TIM, with a strong presence in the prized business segment, and a leading player in mobile.
It comes as mobile operators have struggled to make returns on capital in Italy after France's Iliad arrived in 2018 with cut-price offers.
Swisscom CEO Christoph Aeschlimann said the deal made strategic sense in view of his company's long involvement in Italy and the "flattish" development at home.
"We are in the Italian market in 17 years so this is a next step... reinforcing our position in the market where we are very successful," he told reporters. "I am 100% convinced that this transaction strengthens Swisscom as a whole."
Swisscom's move was backed by Bern, which holds a 51% stake, Aeschlimann said.
The Swiss government said it would review its Swisscom stake this year, including "issues of privatization or partial privatization of the company," without giving more details.
Swisscom has targeted 600 million euros in annual savings mainly from migrating mobile customers from Fastweb to the Vodafone network.
The deal is expected to be closed in the first quarter of 2025, and will not require a shareholder vote.
FINAL STEP
Vodafone's CEO Margherita Della Valle said the deal was the third and final step in reshaping its European portfolio after she agreed to sell its Spanish operation and merge its British unit with Hutchison's Three last year.
In 2022, her predecessor Nick Read rejected an approach worth more than 11 billion euros from Iliad and Apax Partners for the Italian business.
Iliad, whose owner Xavier Niel holds a 2.5% stake in Vodafone, came back with a proposal in December to create a joint venture worth 14.7 billion euros, but was again rebuffed.
Della Valle said she had considered a number of options for Italy, and Swisscom provided the best combination of value creation, up-front cash proceeds and "deliverability".
She said the deal would be reviewed in Italy rather than by the European Commission, meaning a faster decision and less risk of remedies.
The Iliad option would have left Vodafone "exposed to a highly leveraged joint venture in Italy", she added.
($1 = 0.9194 euros)