The deal highlights the increasing appetite for tie-ups among phone companies seeking to cut debt and share heavy investment.
Under the agreement, Vodafone will transfer its Italian mobile masts to INWIT (INWT.MI), which is currently 60 percent owned by TIM, boosting its market capitalisation from 5.1 billion euros (£4.5 billion) to as much as 9.0 billion euros ($10 billion), according to a source close to the matter .
Telecom and Vodafone will each have a 37.5% stake and equal governance rights in the enlarged INWIT.
Both companies could reduce their stake in the merged entity to 25% as the venture will be open to others.
Vodafone will receive 2.14 billion euros in cash from INWIT, which has secured a 2.6 billion euros loan from banks.
Both Telecom Italia (TIM) and Vodafone expect to cut their respective debts with proceeds from the deal.
TIM, which is saddled with more than 25 billion euros of debt, will reduce its burden by 1.4 billion euros over time, it said.
The deal is subject to approval by Italy’s antitrust regulator and INWIT’s minority investors at a shareholder meeting likely to be held in December.
Next year, the new entity is expected to pay out a special dividend of 300-400 million euros to its shareholders, a second source close to the transaction said.
Earlier on Friday Vodafone announced plans to separate its mobile mast operations in Europe into a new company, with a view to listing a minority stake.
Folding Vodafone’s Italian towers into INWIT is part of a three-year strategy plan unveiled earlier this year by TIM CEO Luigi Gubitosi who is attempting to revive the former monopoly.
Alongside the towers deal, TIM and Vodafone are joining forces on the rollout of 5G technology in Italy - a partnership which should yield synergies worth over 800 million euros for each company over the next 10 years.
Both companies stretched their finances last year to secure expensive government licenses for 5G airwaves and suffered aggressive price competition from French operator Iliad (ILD.PA), which launched a low cost mobile offer in Italy.
additional reporting by Gianluca Semeraro, editing by Silvia Aloisi and Elaine Hardcastle