India's Bharti Airtel and South Africa's MTN Group extended talks to combine their operations to create the world's third-largest mobile operator and analysts said Bharti might need to sweeten its offer to clinch the deal.

Underlining the concerns of some key MTN shareholders, Bharti and MTN said separately on Monday the structure and terms of the potential transaction may be adjusted to reflect further discussions between the parties.

As discussions between the parties regarding the potential transaction are continuing, both parties have agreed to extend the exclusivity period, Bharti said.

Bharti and MTN revived merger talks in May, a year after previous talks broke down over who would control a merged entity. MTN held talks with Bharti rival Reliance Communications in May 2008, but these also failed.

This is the first clear indication from Bharti that the price could be increased and deal may not be in the same form, said Sanjay Chawla, a telecom analyst with Mumbai-based brokerage Anand Rathi Financial Services.

They have room to increase the stock part under India FDI (foreign direct investment) rules. But MTN may ask for raising the cash too. It may well end up as a change in both, he said.

A merger of Bharti and MTN, the top mobile operators in both countries, would create an emerging markets giant with more than 200 million customers across India, Africa and the Middle East.

The exclusive talks over the deal, which would see Bharti and MTN pay cash and stock for a stake in the other, were due to end on July 31. Earlier, sources had told Reuters the talks were likely to be extended by at least two to three weeks.

Under the initial terms, MTN and its shareholders would take 36 percent economic interest in Bharti and the Indian firm would end up with 49 percent of MTN.

A combined entity would be the third-biggest mobile operator based on subscribers, behind China Mobile and Vodafone, although its annual sales of $20 billion would be dwarfed by China Mobile's $60 billion and Vodafone's $65 billion.

Shares in Bharti, valued at about $32 billion, were steady by 0700 GMT in a flat market, after earlier rising as much as 1.7 percent. MTN shares rose 0.6 percent.

KEY AFRICAN MARKET

Analysts say Africa being the last of less-penetrated markets in terms of mobile growth presents a big opportunity for global mobile firms, who are seeing cut-rate competition in saturated markets and are facing falling call tariffs.

The deal would give both Bharti and MTN access to new markets ripe for growth, while a full merger, the eventual aim of the talks, would yield cost savings, allow for technology sharing, and provide the financial muscle for more expansion, analysts said.

India's stock market regulator has said MTN and its shareholders can buy 36 percent in Bharti via global depositary receipts without triggering a mandatory open offer, while the foreign shareholding in Bharti should not breach a 74 percent sectoral cap.

We don't think that regulatory issues would be a major hurdle for the deal, said Kevin Trindade, telecoms analyst at brokerage KR Choksey in Mumbai.

But the complex deal would take time as some MTN shareholders want Bharti to pay more.

At this stage, there is not much clarity. But a sweetened offer cannot be ruled out as some MTN shareholders want Bharti to pay more, said R.K. Gupta, managing director at New Delhi-based Taurus Asset Management.

Standard Chartered was advising Bharti Airtel, while Bank of America Merrill Lynch and Deutsche Bank were advising MTN.

($1=47.8 rupees=7.763 rand)

(Additional reporting by Narayanan Somasundaram, Sumeet Chatterjee and C.J. Kuncheria in India; Editing by Ranjit Gangadharan and Anshuman Daga)

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