Tata Communications said on Wednesday it would not make a bid for Britain's Cable & Wireless Worldwide, opening the door for a possible offer from Vodafone for the company.
Vodafone, which in February said it was weighing an offer for the cable company, now has until 1600 GMT on Thursday to say if it will make a bid for Cable & Wireless (C&W), which has a market capitalisation of roughly 1 billion pounds.
"Tata today confirms that it has been unable to reach agreement with CWW on an offer price and therefore confirms that it does not intend to make an offer," the Indian company said.
A spokesman for C&W said the company "was still in ongoing talks with Vodafone."
Vodafone, which is the world's largest mobile operator, by revenue, declined to comment.
Analysts had expected Tata Communications, which is part of the tea-to-technology Tata Group conglomerate, to be prepared to bid 40-45 pence per share for C&W.
The share price of C&W closed up 2.5 percent at 37 pence on Wednesday, after climbing nearly 80 percent since the potential takeover interest became public in mid-February.
It's not clear how much Vodafone Chief Executive Vittorio Colao would be willing to bid but the company has said it would pay for the deal with cash. The company is flush after selling minority assets in China and France in recent years, but Colao has set a disciplined approach to acquisitions.
C&W Worldwide, which has issued a string of profit warnings since its demerger from Cable & Wireless Communications in March 2010, has fixed lines that are used by mobile operators to provide links to mobile transmitters and switching offices -- a process known as wholesale backhaul.
The deal would make strategic sense for Vodafone, analysts say, because it would give it instant access to a fiber network that it can use to boost bandwidth for its Internet-hungry mobile customers.
Vodafone now pays BT Group some 200 million pounds a year to offload huge amounts of mobile traffic to BT's fixed network, so buying Cable & Wireless would allow it to save money while gaining more control.
It would also allow Vodafone to expand into a new business area where Cable & Wireless was strong: providing fixed telephone, broadband, and Internet hosting services to major U.K. companies like Tesco.
For Vodafone, the deal could also brings tax benefits because C&W has racked up billions in losses in recent years, which in theory are available to reduce the taxes due payable on profits earned in the UK.
According to Bernstein Research, the C&W losses amount to 5.2 billion pounds, resulting in a potential 1.2 billion pound tax savings over a number of years.
A person familiar with Tata's thinking said the company pulled out because it felt it could not reap similar cost savings to Vodafone, nor capture the tax benefits since its business is not based in Britain.
Under UK takeover rules, Tata can re-enter the bidding if Vodafone does make a firm offer. The person added that Tata was unlikely to come back into the running unless Vodafone's offer was not attractive to the C&W board.