Swisscom said on Friday it will buy Vodafone Italia for 8 billion euros ($8.70 billion) and merge the business with its Italian subsidiary Fastweb.

The deal will create Italy's second-biggest fixed-line broadband operator behind TIM, with a strong presence in the prized business segment, and a leading player in mobile.

The debt-financed deal will be paid in cash, Swisscom said.

Vodafone said it would return 4 billion euros of capital to shareholders and halve its dividend to 4.5 euro cents a share from its 2025 financial year onwards following the Italian deal and the sale of its Spanish operation agreed last year.

"Vodafone Italia and Fastweb will bring together complementary high-quality mobile and fixed infrastructures, competencies, and capabilities to create a leading converged challenger in a market with material growth opportunities," Swisscom said in a statement.

The deal is expected to be closed in the first quarter of 2025, and will not require a shareholder vote, Swisscom said.

Swisscom, which has the Swiss government as its controlling shareholder, has been operating in Italy since 2007 via Fastweb, with the business increasing by 50% in terms of customers and revenue over the last 10 years.

"With the merger we're creating a leading provider in a market with great growth opportunities and in doing so taking a big step towards our goal of profitable growth in Italy," Swisscom CEO Christoph Aeschlimann said in a video statement.

Vodafone's CEO Margherita Della Valle said the deal was the third and final major step in reshaping its portfolio after she agreed to sell its Spanish operation and merge its British unit with Hutchison's Three last year.

Swisscom said last month the deal would boost its cash flow and would have "a positive impact on its dividend policy".

The Swiss firm's Fastweb currently provides mobile services on Hutchison's Wind Tre's network, and the two companies have an agreement to roll out 5G networks.

Della Valle, who started her Vodafone career in Italy, is seeking to improve Vodafone's profitability by striking major deals, something which eluded her predecessor.

Investors have been unsure about the deals, and Vodafone's shares trade at around half the level they did two years ago. ($1 = 0.9194 euros)

(Reporting by John Revill and Paul Sandle, editing by Linda Pasquini, Kim Coghill and Jane Merriman)