Tullett to buy ICAP's voice broking business

* Deal structured as $1.68 bln reverse takeover

* Interdealer brokers hit by shrinking trading volumes

* ICAP (LSE: IAP.L - news) shares rise 7 pct, Tullett down 9 pct (Adds details, CEO, analyst comment, updates share price)

By Roshni Menon

Nov 11 (Reuters) - British interdealer brokers Tullett Prebon Plc and ICAP Plc have agreed to combine their voice broking businesses in a 1.11 billion-pound ($1.68 billion) deal to better compete in a sector where trading volumes have shrunk.

In a reverse takeover, Tullett is buying the global hybrid voice broking and information business of its much bigger peer to create the largest player in that sector, while ICAP will focus purely on electronic trading and post-trade services.

Interdealer brokers, which match buyers and sellers of currencies, bonds and other tradeable instruments, have been hit in recent years by regulation designed to rein in the riskier trading activities of their traditional investment bank clients.

Traditional telephone broking services have also faced sweeping reforms, as regulators push more derivatives trading onto electronic platforms to make the market more transparent.

"We continue to see voice as a difficult business, but expect the merged entity to have scale benefits," BofA Merrill Lynch analysts wrote in a note.

ICAP's shares rose almost 7 percent to rank among the top gainers on the FTSE-250 Midcap index, while Tullett's stock fell more than 9 percent.

Markets have become more volatile this year, led by uncertainty around the timing of an interest rate move by the U.S (Other OTC: UBGXF - news) . Federal Reserve as well as concerns over slowing Chinese growth, low commodity prices and geopolitical instability.

Kicking off consolidation among interdealer brokers this year, BGC Partners (NYSE: BGCA - news) acquired U.S. rival GFI Group (Other OTC: GFIG - news) after a protracted takeover battle.

STOCK DEAL

ICAP, one of the world's largest interdealer brokers, was founded in the 1980s by its current chief executive, British businessman Michael Spencer. It (Other OTC: ITGL - news) has been in talks with Tullett for months.

After the deal, ICAP will hold 19.9 percent and its shareholders 36.1 percent of a Tullett enlarged by the issue of new shares. Tullett's existing shareholders will own 44 percent of the new company.

Tullett will continue under the name TPICAP, employing around 3,000 brokers and 2,000 support staff, Chief Executive John Phizackerley said on a call with reporters.

Tullett expects to save at least 60 million pounds by eliminating duplicated management and support costs, with more savings expected over time. It will take on the ICAP unit's gross debt of 330 million pounds.

The slimmed-down ICAP will retain the electronic platforms EBS and BrokerTec, the transaction processing business Traiana and post-trade risk mitigation businesses TriOptima and Reset.

By shedding its voice broking business, the new ICAP will be permitted to carry less capital on its books, thus raising its potential to make acquisitions and invest in start-ups, Spencer, who will remain chief executive, said on the call.

"This capital issue effectively meant that, at some point, the split of ICAP into an electronic post-trade business on one side and voice broking business on the other was an inevitability," he said.

ICAP's shares were up 5.6 percent at 498.1 pence at 1200 GMT. Tullett's were down 8.1 percent at 330.0 pence. ($1 = 0.6594 pounds) (Reporting by Roshni Menon in Bengaluru; Editing by Gopakumar Warrier and Robin Paxton)