Great Portland Estates said it was in talks to buy London Merchant Securities, which would form the country's sixth biggest listed property company with a speciality in office property.

The announcement came after London Merchant, which has restructured by spinning off venture capital arm Leo Capital, said on Monday it was considering a possible merger with an unidentified third party.

The board of GPE (Great Portland) confirms that it is engaged in preliminary discussions with London Merchant Securities concerning a potential merger, Great Portland said in a statement on Tuesday.

GPE anticipates that any merger transaction would involve a share for share offer by GPE for London Merchant Securities.

The combined company, which would be worth around 1.7 billion pounds at current share prices, would replace Brixton to rank sixth.

The acquisition would about double GPE's property portfolio to over 2 billion pounds and help it benefit from the booming London office market when it converts into a real estate investment trust (REIT) next year.

There's quite a lot of logic in the deal ... overlapping interest and benefit in size ... a company is going to be more attractive as a REIT when it's larger ... It would be a takeover rather than a merger as Great Portland will be running the combined company, said Tom Gidley Kitchin, a Charles Stanley analyst.


A REIT, which Britain plans to introduce in 2007, is a company that manages a property portfolio and pays little or no tax on the rental income that it pays out in dividends to shareholders.

I wouldn't necessary see the deal as automatically going to happen. I think the family that effectively controls London Merchant would expect to receive some sort of premium for giving up control, and so it's quite possible they may not be able to agree on price, Gidley Kitchin said.

London Merchant shares were down 2.6 percent to 263 pence by 1223 GMT (1:23 p.m. British Time), and Great Portland down 2.3 percent to 597 1/2p, valuing the two companies at around 774 million and 971 million, respectively.

London Merchant's 1.1 billion property portfolio includes 55 percent in office property, mainly in the capital's West End district, and 32 percent in retail and leisure assets across the UK. Around 80 percent of Great Portland's assets are in the West End, with the remainder in the City of London financial district and Southwark area.

Both Great Portland and London Merchant have said they have been considering conversion into a REIT.

London Merchant is 40 percent owned by the family of Chief Executive Robert Rayne, while Great Portland is 25 percent owned by Morgan Stanley Investment Management.