By Elvira Pollina and Paul Sandle

MILAN/LONDON (Reuters) – Vodafone (NASDAQ:) will doubtless maintain a minority stake in a mixed entity with Swisscom’s Italian unit Fastweb if a deal is reached on a possible tie-up of their Italian operations, three individuals conversant in the matter stated.

Vodafone’s Chief Government Margherita Della Valle stated earlier this month the British group was in “lively discussions” in Italy, days after rebuffing a proposal by rival Iliad to create a 50:50 three way partnership within the nation.

A number of sources have recognized Swisscom’s Fastweb as the opposite get together within the talks.

The potential deal being mentioned would see Vodafone take a minority stake within the mixed entity, which might take its debt off Vodafone’s steadiness sheet, stated the individuals, who declined to be named as a result of talks are usually not public and are ongoing.

Spokespeople for Vodafone and Swisscom declined to remark.

Operators in Italy are finding out methods to consolidate a market grappling with shrinking income and margins, which is depriving traders of returns on their capital.

A take care of Fastweb would create Italy’s second-largest fixed-line broadband operator with a robust presence within the prized enterprise phase.

It might additionally face decrease regulatory hurdles than a mixture with Iliad however gives decrease potential synergies, in accordance with analysts.

Iliad, majority owned by French billionaire Xavier Niel, is constant to push consolidation in Europe, and on Monday it unveiled an settlement to purchase a 19.8% stake in Swedish telecoms operator Tele2 (ST:) from funding firm Kinnevik.

Italy is the ultimate main market Vodafone desires to repair after it agreed final yr to merge with Hutchison’s Three in Britain and promote its struggling Spanish operation.

Della Valle, nonetheless, has stated Italy is a really completely different market from Spain for Vodafone.

She stated in November that Vodafone was outperforming its main opponents in Italy with its sturdy model and community, however it was a really difficult market by which no participant was delivering returns in extra of value of capital.

Vodafone would in all probability not embrace in its accounts any entity by which it holds a stake of fifty% or decrease, which might take the brand new firm’s debt off its books however restrict any management over its money flows, that means it couldn’t depend on the revenue to fund its personal shareholder returns.

Vodafone has already stated it should overview its capital allocation, together with its dividend and any buyback, after the Spanish deal completes, anticipated within the first half of this yr.

Della Valle advised analysts this month that she nonetheless supposed to replace shareholders on its new capital allocation coverage in Could, whatever the consequence of the Italian talks.