NEW YORK (The Deal) -- VimpelCom  (VIP) announced an agreement on Thursday to merge its Italian telecommunications operations with that of Hong Kong's Hutchison Whampoa to create a new powerhouse in Europe's fourth-largest telecoms market.

The move to combine VimpelCom's Wind Telecommunicazioni SpA with Hutchison Whampoa's 3 Italia SpA subsidiary, Italy's No. 3 and No. 4, respectively, comes more than two years after the companies first started talking. In May, the companies announced they were in "exploratory" talks.

The combined entity aims to become a stronger rival to Telecom Italia SpA  (TI) and Vodafone Group  (VOD), but is expected to get close scrutiny from EU competition watchdogs concerned about M&A that cuts the number of market players from four to three.

VimpelCom expects to complete the deal within 12 months.

"This transaction obviously first and foremost will mark a new era for telecoms in Italy," VimpelCom CEO Jean-Yves Charlier said on a conference call.

In a statement, Hutchison Whampoa's Canning Fok said the joint venture "will create a financially sound and efficient operator that is able to compete head-on in the marketplace."

VimpelCom said the new entity will operate as a 50/50 joint venture, led by current Wind CEO Maximo Ibarra, with 3 Italia's current CEO Vincenzo Novari as a senior adviser for Italy. Italia's current COO Dina Rivera will lead the merger integration process and then serve in a senior operating role in the combined business, while 3 Italia's current CFO Stefano Invernizzi in the same role post-merger.

The merged entity will have more than 31 million mobile and 2.8 million fixed-line customers and would have had €6.4 billion ($7 billion) in 2014 revenue.

Separately on Thursday, VimpelCom announced a new plan to boost cash flow to $750 million within three years on the back of a tough quarter. Second-quarter revenue fell 26% year-on-year to $3.76 billion, as Ebitda fell 26% to $1.5 billion.

Hong-Kong based Hutchison is a conglomerate controlled by tycoon Li Ka-shing. Amsterdam-headquartered VimpelCom is owned by LetterOne Holding SA, the investment vehicle of Russian billionaire Mikhail Fridman, and Norway's Telenor ASA (TELNY).

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