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By Tom Westbrook
SYDNEY (Reuters) - Australia's TPG Telecom Ltd (TPM.AX) is in merger talks with Vodafone's local business, a tie-up that could reduce competition by combining TPG's soon-to-be-launched mobile network with the smallest of the three existing players.
TPG, which provides broadband services, stunned the market last April when it paid A$1.3 billion (£745.8 million) to buy spectrum to build it own mobile network.
Vodafone Australia, a 50:50 joint venture between Hutchison Telecommunications (Australia) (HTA.AX) and Vodafone (VOD.L), is the third-biggest mobile player by subscriber numbers after Telstra and Optus.
A tie-up could provide a faster and cheaper entry into the mobile network market for TPG, analysts said. The company already offers mobile services on a virtual network on Vodafone's infrastructure.
TPG's shares soared 20 percent to a near-two-year high on Wednesday, their biggest daily gain since 2009.
TPG and Vodafone Australia said in separate statements they were in "exploratory" talks, while offering no details such as whether a deal would represent a takeover by either party.
"There is no certainty that any transaction will eventuate or what the terms of a transaction would be," TPG said, while Vodafone called the talks "non-binding".
But the news was enough for investors to envisage a significant reshaping of TPG's strategy to spend billions of dollars to roll out its own network infrastructure.
"The reason the market reacted positively is they see that TPG doesn't have to spend an enormous amount of money in building a network; they can just utilise the Vodafone network," said telecommunications analyst Paul Budde, who runs his own consultancy.
Shares in tightly held Hutchison Telecommunications (Australia) (HTA.AX), which owns half of Vodafone Australia, jumped 50 percent to a three-year high even as the broader market (.AXJO) edged 0.3 percent lower.
Vodafone's shares rose 1 percent in London.
Budde added a deal could give Vodafone access to new customers, while rivals such as Telstra (TLS.AX) and Optus "will feel relieved" since a combination would spare them extra competition.
"It looks to me that the entry of TPG in the market will now be significantly less aggressive than if they would have done it on their own," he said.
TPG's announcement last April that it planned to build a network sent shockwaves through an industry already under huge margin pressure.
Telstra shares, which had plunged then, had their best day in 18 years, leaping 7 percent to hit their highest since May.
(Reporting by Tom Westbrook in SYDNEY, additional reporting by Aaron Saldanha in BENGALURU and Paul Sandle in LONDON; Editing by Chang-Ran Kim and Mark Potter)