Last checked at 
* Vodafone-Idea talks put focus on India's smaller mobileplayers
* Most firms will need to pursue mergers or exit - analysts
* Vodafone-Idea deal would create India's top player
By Sankalp Phartiyal and Devidutta Tripathy
MUMBAI, Jan 31 (Reuters) - A proposed merger betweenVodafone's India operation and Idea Cellular would create a market leader in India's crowded andhyper-competitive telecoms sector, forcing smaller players intotwo likely options: merge or exit altogether.
Britain's Vodafone confirmed on Monday it was in talks tomerge its Indian subsidiary with its local rival in an all-sharedeal, driving Idea's shares to a near six-month high on Tuesday.
The combined entity would be a formidable player, with asubscriber base of about 395 million and a revenue market shareof around 40 percent in the country's telecoms sector, althoughdivestments would be needed in certain regions to comply withcompetition rules, analysts said.
Both complement each other. Idea is stronger in rural areasand Vodafone's Indian unit is more competitive in cities, andthey would be able to cut costs mainly through reduced capitalspending and network operating costs, analysts added.
That synergy would pose a direct threat to current marketleader Bharti Airtel and Reliance Jio, the upstartlaunched by billionaire Mukesh Ambani last year that hasup-ended India's telecoms market with free voice and data untilthe end of March.
That kind of intensifying competition would raise the stakesfor India's smaller wireless providers, with analysts predictinga period of consolidation to allow them to better competeagainst the top three players.
The stakes would be especially high for small players suchas Telenor or Tata Teleservices. VideoconTelecom, for example, is already in the process of exiting.
"If data (from Jio) is free and the likes of Bharti,Vodafone and Idea have a huge post-paid subscriber base and goodproducts, I wouldn't be surprised if there is furtherconsolidation in the sector or some smaller players exit," saidNaveen Kulkarni, co-head of research at PhillipCapital.
Jio's entry has forced players to offer cheaper plans oftheir own, cutting deeply into their profits.
Deals are already in the works. Reliance Communications, controlled by Anil Ambani, has agreed to acquireSistema's Indian mobile phone operations. It has alsoagreed to combine its wireless business with Aircel, majorityowned by Malaysia's Maxis.
Meanwhile, Bharti Airtel is in talks to acquire Telenor'sIndian operations, local media has widely reported.
Bharti Airtel welcomed the proposed alliance betweenVodafone and Idea, saying "consolidation is always good",although it said companies must not be forced into consolidationby an "unfair playing field".
But mergers won't guarantee success in India's telecomssector, analysts warned.
India remains a capital-intensive market. Spectrum costs arehigh and big investments in network are needed to cover a vastgeography. At the same time margins are wafer-thin, as carriersoffer one of the world's cheapest data and voice prices.
"If it eventually becomes a market of three players, goodfor them. They will make money," said a banker who is notinvolved in the deal and did not wish to be named.
"I don't see any future for the small ones. They will betaken over or will exit the market." (Writing by Rafael Nam; Editing by Adrian Croft)
