By Paul Sandle and Paolo Laudani
LONDON (Reuters) -Swisscom said on Wednesday it was in exclusive talks to buy all of Vodafone (LON:VOD) Italia for 8 billion euros ($8.7 billion) to merge the business with its Italian subsidiary Fastweb.
The proposed purchase would be in cash and on a debt-free basis, the two companies said in separate statements.
Shares in Vodafone, which last month rejected a rival proposal from Iliad, rose 1%, with Swisscom 0.5% lower.
A deal would create Italy's second-largest fixed-line broadband operator behind TIM, with a strong presence in the prized business segment, and a leading player in mobile.
It would also cap a busy first year for Vodafone CEO Margherita Della Valle, who had vowed to tackle three problematic markets in which it makes no return on its capital.
If a deal is struck, Della Valle will have reshaped all three markets, after she agreed to sell its Spanish operation and merge its British unit with Hutchison's Three last year.
Vodafone last month rejected an offer to create a joint venture with Iliad in Italy, under which it would have received 6.6 billion euros in cash in a deal valuing Vodafone Italia at 10.45 billion euros.
It said it was considering other options and Reuters reported this month that Swisscom was the only remaining party in talks with the British company over its Italian business.
CERTAINTY
Vodafone said on Wednesday it believed the proposed Swisscom deal delivered the "best combination of value creation, upfront cash proceeds and transaction certainty".
Swisscom said it would boost its cash flow and would have "a positive impact on its dividend policy".
Swiss investment company Vontobel said the deal would create a strong contender in Europe's most challenging telco market but given the debt burden and integration efforts, a near-term positive impact on Swisscom's dividend policy was unlikely.
Swisscom's Fastweb currently provides mobile services on Hutchison's Wind Tre's network, and the two companies have an agreement to roll out 5G networks.
Della Valle, who started her Vodafone career in Italy, is seeking to improve Vodafone's profitability by striking major deals, something which eluded her predecessor.
The major advantage of a Fastweb deal was a much lower regulatory bar than combining with Iliad, albeit at the cost of lower potential synergies, analysts have said.
Investors have been lukewarm about Della Valle's changes and Vodafone's shares trade at around half the level they did two years ago, with some fretting about a possible dividend cut.
Vodafone has said it will update the market on shareholder returns policy by its full-year results in May.
($1 = 0.9242 euros)