Buried under debt in small, highly competitive markets, Europe's telecom operators have been talking about consolidation for years but were wary of scrutiny by regulators, which have taken a tough line on any moves that lower competition.

The pandemic, however, has underscored the importance of telecom networks, and regulators may have become more sympathetic to mobile operators trying to cut debt through mergers and invest in new 5G services, industry analysts say.

"It's a real litmus test for the sector that could open up the doors for other opportunities," said CCS Insight analyst Kester Mann. "It's going to be closely watched by other operators."

Approval could pave the way for similar deals in Britain, France, Italy and Portugal that would reduce the number of players in the market to three from four, analysts say.

The Orange-MasMovil tie-up, between Spain's second and fourth largest telecoms operators, is the first big deal since the European Commission blocked CK Hutchison's $12.6 billion purchase of Telefonica's British mobile unit O2 in 2016.

Since then, Europe's telecoms deals have focused on adding subscribers or capacity without changing the competitive landscape. But the Spanish merger is big enough to face a full-scale, four month investigation by the Commission after a preliminary review, industry sources told Reuters.

The Commission did not immediately respond to a request for comment.

Regulators are concerned mergers could lead to higher prices, less choice and a reduction in quality for consumers, particularly if two players join forces in one market.

MasMovil does not have a large mobile network in Spain and is confident demands made by regulators as a condition for approving the deal would not be too onerous, according to sources directly involved in the process.

Orange will seek to counter possible regulatory concerns by pointing to the rollout of fibre in Spain and the expansion of mobile companies into areas such as broadband as proof of strong competition in the country, a person familiar with matter said.

The companies aim to take the combined business public in three to four years, after closing the deal the second half of 2023.

FOUR BECOMES THREE

In Europe, many countries have four telecom operators jostling for share in small markets, which usually equates to lower prices for consumers but less profit for the companies, analysts say.

In contrast, the United States is dominated by three main players - AT&T, Verizon and T-Mobile. That can result in higher prices for customers and higher profits for the companies.

Vodafone, Orange, Telefonica and Deutsche Telekom are the biggest European telecom operators and have a presence in several countries.

Any deals that reduce competition in European countries from four players to three would likely benefit their businesses in the long term by enabling them to raise prices, analysts say.

Vodafone, a vocal supporter of consolidation, is reportedly in talks with Hutchison's Three network in Britain.

Vodafone boss Nick Read on Monday declined to comment on any potential deal, but reiterated there was room for consolidation in Britain.

(Reporting by Supantha Mukherjee in Stockholm, Foo Yun Chee in Brussels, Andres Gonzalez in London and Elvira Pollina in Milan; Editing by Matt Scuffham and Mark Potter)

By Supantha Mukherjee and Foo Yun Chee