Two of the biggest names in the Indian telecom industry, Tata Group and Bharti Enterprises, are exploring a possible merger of their telecom assets, according to media reports.

Any deal would apparently bring together Tata Sky, Tata Teleservices Ltd. and Tata Communications Ltd. with Bharti Airtel, which is currently India's biggest mobile operator.

With total debts of about 300 billion Indian rupees ($4.63 billion), Tata Group has been trying to exit the telecom business for some time. Even before the arrival of new entrant Reliance Jio in the market in September last year, Tata had been struggling. RJio's aggressive marketing of free and low-cost services has only made matters worse.

Tata was previously thought to be in talks with Vodafone India about a possible merger, but Vodafone is now focused on its merger with number three player Idea Cellular Ltd. For Tata, a tie-up with Airtel, in which it would have a minority stake, could be an attractive alternative. (See Vodafone, Idea Strike $23B Deal to Form India's Biggest Telco.)

As for Airtel, it has been feeling the pressure ever since Vodafone and Idea announced their wedding plans. With nearly 400 million customers, against Airtel's 280 million, that new-look entity will usurp Bharti Airtel Ltd. (Mumbai: BHARTIARTL) as India's biggest operator. But if the deal with Tata goes through, Airtel will gain another 48 million subscribers and ensure it does not fall too far behind in the subscriber stakes. Importantly, Airtel would also gain access to some valuable 800MHz spectrum that it could use to support its rollout of 4G services.

The merged entity will also become a formidable player in the direct-to-home (DTH) TV market, and even be in a position to lead it. Currently, Tata serves about 23% of that market, while Airtel has a 21% share. Market leadership could be important as RJio gets ready to launch its own TV offerings.

The other big attraction for Airtel is access to Tata's enterprise assets through the tie-up with Tata Communications. This matters because India's enterprise market is likely to become more valuable from a service provider perspective as the consumer market loses its sheen.

"From structuring and approval perspectives, the easiest transaction would be for Tata Teleservices to be subsumed by Bharti Airtel," says a recently released report from market research company CCS Insight. "Our view is that the main alternative is a tie-up with BSNL, but other combinations exist, such as a merger with the Reliance Communications-Aircel business."

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Even so, the deal is not going to be without challenges. First and foremost is Tata's huge pile of debts, which could prove an impediment to any agreement. Moreover, combining the various entities of the two companies will not be straightforward. For one thing, the Indian government still owns a 26% stake in Tata Communications. And the DTH arm of Tata Group, Tata Sky, has external investors, including Rupert Murdoch's 21st Century Fox.

Yet any tie-up would be just the latest in a series of deals that have swept India's telecom market over the past couple of years. The merger between Vodafone and Idea is the biggest so far, but Airtel has already been active on the M&A trail, acquiring Tikona Digital Networks Pvt. Ltd. and Videocon Telecommunications Ltd. earlier this year. As pressure on margins grows, the big telcos are snapping up the smaller ones. (See Airtel Acquires Tikona to Fill 4G Gaps and Airtel Acquires Videocon's 1800MHz Spectrum.)

In fact, the CCS Insight report says there is now a strong possibility that RJio acquires number five player Reliance Communications Ltd. "[As] the results from our survey show, a number of experienced market commentators believe a merger with Reliance Communications is inevitable," says the company. "An agreement between RJio and Reliance Communications makes sound strategic sense and should be possible to agree between the various stakeholders from a financial perspective. The only possible stumbling block is the emotion surrounding a deal."

If that kind of deal happened, India would be left with just a small number of giant operators -- something analysts have been anticipating for a long time. (See Indian M&A: And Then There Were 5?)

— Gagandeep Kaur, contributing editor, special to Light Reading