By John Revill and John Miller
(Reuters) - Switzerland's Sunrise Communications Group has confirmed it is in talks over a potential acquisition of broadband provider Liberty Global's Swiss business UPC Schweiz.
Analysts have said a tie-up makes sense, given that Sunrise and UPC's fixed and mobile services would make the combined entity a stronger rival to the dominance of state-controlled Swisscom.
"We also see 1-2 billion Swiss francs ($1 billion to $2 billion) of potential synergies," Barclays analysts said.
Liberty has been hurt by weak operating momentum at its Swiss unit, making reduced exposure to the Alpine republic attractive for shareholders. The cable provider has already unloaded its unit in neighboring Austria.
The Financial Times had reported on Friday that Sunrise was in advanced discussions over a potential deal.
Sunrise confirmed late on Tuesday that it is in negotiations and that the proposed deal would not alter its progressive shareholder distribution policy, allaying analyst fears of reduced annual payments.
It gave no further details, saying only that it would make a further announcement when appropriate.
"We note the press release issued by Sunrise and have no further comment to make," a Liberty Global spokesman said.
Analyst estimates give Liberty's Swiss unit a valuation of about 4.9 Swiss billion francs for a business that generates estimated core profit of about 700 million francs.
Swisscom is by far the biggest telecommunications company in Switzerland, with 11.7 billion francs in revenue and 6.6 million mobile phone customers in 2017.
Sunrise, by contrast, had a total of 3.4 million customers, with 2.4 million mobile phone customers, generating revenue of 1.85 billion francs in 2017.
Smaller UPC had about 1.1 million TV customers, amid falling subscriptions, and 138,000 mobile phone clients in Switzerland, company documents show.
Should a Liberty-Sunrise deal be completed, UBS analysts said Swisscom could suffer lower revenue from wholesale broadband and the loss of payments from UPC to use its network for its mobile business.
"The majority of Sunrise's broadband customer base is currently provided through Swisscom infrastructure," said UBS analyst Nicholas Prys-Owen.
"One area of synergy (with UPC) could be migrating some of these customers onto cable infrastructure."
Sunrise shares have dropped 9 percent this year, while Swisscom -- due to report 2018 earnings on Thursday -- is about flat. Liberty Global stock is up more than a fifth since the start of the year.
($1 = 1.0003 Swiss francs)
(Reporting by Kanishka Singh in Bengaluru and Paul Arnold in Zurich; Editing by David Goodman)