* Vodafone, Idea Cellular in talks for all-share merger
* Talks at preliminary stage, may not lead to a deal
* Vodafone gains; Idea up 25 pct, adds $1 bln to market cap
* Deal would reduce intense competition in India - analysts (Updates with analyst quote, share prices details, background)
By Kate Holton and Sankalp Phartiyal
LONDON/MUMBAI, Jan 30 (Reuters) - Britain's Vodafone Group confirmed on Monday it was in talks to merge its Indiansubsidiary with local rival Idea Cellular in anall-share deal that would create a new market leader better ableto contest a brutal new price war.
Vodafone, the world's second-largest cellphone operator, hasendured a tumultuous ride since it entered India in 2007, withfierce competition and a high-profile tax battle making abusiness contributing more than 10 percent of its revenues andprofits its most unpredictable by far.
"There is no certainty that any transaction will be agreed,nor as to the terms or timing of any transaction," Vodafone saidon Monday of its talks with Idea.
Last year the market was thrown into fresh turmoil with thelaunch of Reliance Jio Infocomm, the new 4G mobile broadbandnetwork built at a cost of more than $20 billion by India'srichest businessman Mukesh Ambani as part of his RelianceIndustries conglomerate.
Jio has made an immediate impact with the launch of freevoice calls and cut-price data services, forcing the country'sthree biggest operators - Bharti Airtel, Vodafone andIdea - to slash prices and accept lower profits.
Jio's aggressive assault on the market forced Vodafone totake a $5 billion writedown on Vodafone India last year,prompting Chief Executive Vitorio Colao to say at the time thatthe market would have to consolidate.
"I think consolidation is the answer," he said. "You cannotdefy the rules of economics."
According to analysts at Berenberg, a combined Vodafone-Ideagroup would have around 375 million subscribers and around a 36percent market share, well ahead of Bharti with around 260million subscribers.
Berenberg also said the two firms would complement eachother geographically, although some overlaps could requiredivestments to satisfy the regulators.
Shares in Vodafone were up 2.7 percent at 199 pence by 1211GMT. Shares in Idea Cellular were up 25 percent, its biggestgain on record, adding 71 billion rupees ($1.05 billion) to itsmarket value, while shares in Reliance Industries were up 2percent and Bharti Airtel was up 7 percent.
Idea said that the initial talks were based on equal rightsbetween its owner, Aditya Birla Group and Vodafone, withVodafone gettting shares in Idea.
MARKET TURMOIL
Analysts have long expected consolidation in India'stelecoms industry, where the market is divided into 22geographical areas, or circles. Under the rules, companies arerestricted on the percentage of airwaves they can own in eachcircle to prevent any one group becoming too dominant.
Shares in market leader Bharti Airtel surged on hopes forreduced competition after saying last week its net profit forthe December quarter slumped to its lowest level in four yearsbecause of competition from Jio.
"The immediate benefit for the next one to two years forIdea and Vodafone would be to extract synergy values," said atelecoms industry analyst at a domestic brokerage notauthorised to talk to the media.
He added that a smaller field would also make it easier forJio to "get a decent market share and make profits."
As with some other joint ventures that Vodafone has, amerger would enable the firm to deconsolidate the business,leaving it as a shareholder benefitting from dividend payments.
Vodafone also said on Monday that a deal with Idea would notinclude Vodafone's 42 percent stake in Indus Towers, the radiomasts owner created by Bharti, Vodafone and Idea.
Analysts at Morningstar said if successful the deal wouldreduce Vodafone's subscriber base by about 40 percent and lowerits revenue growth rate. However it would lead to a smallincrease in its core profit margin because India has lowermargins than the wider group.
Less than a year ago Vodafone was still planning to floatVodafone India on the local stock exchange, despite along-running battle with the government over a $2 billion taxclaim related to its acquisition of the unit from CK Hutchison in 2007.
For Vodafone a sale of the Indian business to Idea couldreignite speculation about an eventual tie-up between Vodafoneand John Malone's Liberty Global.
The two have held merger talks before but analysts sayVodafone's ownership of numerous assets in emerging markets hadcomplicated valuations for Liberty, which is mainly interestedin the European operations.($1 = 67.9329 Indian rupees) (Additional writing by Paul Sandle; Editing by Louise Heavens,Greg Mahlich)