There is probably a market but not huge because it would mainly be a subset of the small tablet market which is already not huge.
I don’t think folding 2-in-1s would bring too many non-small tablet users into the market because I venture to guess that most people who don’t have a small tablet are content enough with their phone screen size options. And if they do want a bigger screen, maybe they prefer it to be an even bigger screen. To get those users to bite on a 2-in-1, there would have to be very little cons. But even assuming the tech is flawless, the cons are significant—double phone thickness in pocket, awkward aspect ratios, and increased price.
Although with double thickness, maybe there would be an increase in battery life, and maybe many would welcome that.
Some small tablet users also wouldn't want the cons of combining. It would be a slightly different set of cons though. Increased price of the phone wouldn’t matter since you’re saving money on not buying a second device. But an added con would be lower total battery life since it’s one device. And then some of the same cons such as double phone thickness. But I’d say a decent amount of small tablet users would probably be interested.
I am a small tablet user myself but I’m a bit of a different case because I don’t want to use my iPad Mini outside of my home. I want to do all my consumption only at home, so I don’t want anything bigger than a phone when I’m out. Also, I would prefer an even smaller tablet that could fit into my pocket so that I could easily keep it with me around my home, something like 7” which really blurs the line between phone and tablet. But that is unlikely to ever exist so as a compromise, I would be interested in a folding iPad Mini, but it would stay at home, and I would keep my phone.
