MTN Group Ltd. is in talks to buy smaller domestic rival Telkom SA SOC Ltd. in a deal that would make the combined company the biggest South African mobile-phone operator by number of subscribers.

MTN proposed to pay for the partially state-owned Telkom in shares or a combination of cash and stock, according to a statement on Friday. Discussions are at an early stage and there is no certainty the transaction will be completed, the carriers said.

Telkom shares surged 33% as of 11:56 a.m. in Johannesburg to 43.52 rand, valuing the company at 22.5 billion rand ($1.3 billion). Bloomberg first reported MTN’s interest in Telkom in November.

MTN is flush with cash — after a multi year asset-disposal program — and is looking to strengthen its position in its core African markets. A combination with Telkom would close the gap with rival Vodacom Group Ltd., South Africa’s market leader controlled by the UK’s Vodafone Group Plc. A recent spectrum auction made the continent’s most-industrialized economy even more attractive to operators.

While a deal would need to pass certain regulatory and competition concerns, “it makes financial sense to go after all of Telkom given many other undervalued assets” in the company, said Peter Takaendesa, head of equities at Mergence Investment Managers. “I’m sure they have found ways to deal with potential problem areas such as spectrum that may cause regulatory and competition commission issues.”

Effective Duoply
A number of antitrust concerns would have to be worked through as the deal would create an effective duopoly — the fourth and smallest rival only has 12.9 million subscribers. In 2016, Vodacom had to drop a plan for the acquisition of local fixed line operator Neotel, due to regulatory complexities.

“We think South Africa’s Competition Commission would seek to block a transaction,” John Davies, a senior analyst at Bloomberg Intelligence, said in a note. “A deal could reduce mobile networks in the country to three from four and remove one of the price leaders, which has been shown in other countries to work against consumer interests.”

Another key issue will be what MTN is willing to pay for Telkom, said Takaendesa. “Consensus price targets for Telkom are in the 50 rand to 60 rand range, but an industry acquirer is expected to pay a premium.”

MTN’s shares advanced 3.8%. They have dropped 18% this year.