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Indian cellular service company Reliance Communications Ltd. said Wednesday it is combining its wireless business with smaller rival Aircel Ltd., closing the distance between it and bigger players in an increasingly competitive sector.

Under the terms of the agreement, which the two companies in a joint statement called the "largest-ever consolidation in the Indian telecom sector," Reliance Communications and Malaysia's Maxis Communications Bhd., Aircel's majority owner, will each own half of the new company.

Reliance Communications' debt will be reduced by 200 billion rupees ($3 billion). Aircel's debt will fall by $600 million when the deal is completed next year, according to the statement.

"We expect this combination to create substantial long term value for shareholders" of both companies, Anil Ambani, chairman of Reliance Group, said in a statement. Mr. Ambani cited benefits like additional spectrum, cost and revenue synergies.

Reliance Communications, which in December said it was in talks to acquire Aircel, needs more bandwidth to offer coverage in more areas to compete with deeper-pocketed rivals like Bharti Airtel Ltd. and Vodafone Group PLC's India unit.

Indian mobile operators are racing for users as more new consumer come online, particularly on low-cost smartphones.

Earlier this month Mukesh Ambani, India's richest man and Anil Ambani's brother, said he planned to shake up the country's telecommunications industry through a new cellular company, Reliance Jio Infocomm Ltd., offering data at rock bottom rates.

Competitors have been slashing prices in recent months, ahead of Reliance Jio's launch, to try to keep customers from switching providers, analysts say.

Reliance Communications is "definitely trying to scale up its user base and strength in the market" to better compete with Bharti Airtel and Vodafone, said Neha Dharia, an analyst at telecommunications research firm Ovum.

Write to Newley Purnell at newley.purnell @wsj.com

(END) Dow Jones Newswires

September 14, 2016 13:25 ET (17:25 GMT)

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