A deal would give Bass control of the Tetley brand and return it to pole position in the UK brewing league, a position it lost last year when Scottish & Newcastle bought Courage.
Tentative talks between Bass and Allied began before Christmas but more concrete discussions have now started to take place. Although the negotiations are fraught with difficulty, Bass is still keen to strike a deal and gain control of the Tetley bitter brand - one of the top two selling beers in the UK.
Bass's initiative is part of what industry analysts believe is an "inevitable consolidation" in the industry to deal with an over-supply problem. Brewers can now produce five pints for every four they can sell.
The takeover would almost certainly make Bass, led by chairman and chief executive Sir Ian Prosser, the biggest brewer in the UK once more. It would also deal a sharp blow to Whitbread, the country's fourth largest beer producer. Whitbread has also been trying to court Carlsberg Tetley, which analysts reckon is worth up to pounds 500m, and also lost out in the race to buy Courage.
Both Bass and Allied Domecq yesterday stood rigidly behind a "no comment" policy when questioned about the talks, and the possibility that a deal may be consummated before the summer. However, an industry source said: "The two sides have been in discussions for some time, and they have recently achieved some considerable progress."
It is also understood that the Office of Fair Trading and the mergers and acquisitions advisory unit at the Department of Trade and Industry have been consulted. Any move by Bass would undoubtedly result in tough concessions, such as selling some breweries or pubs, to obtain the necessary regulatory approval.
Combined market shares of Bass and Carlsberg Tetley would be close to 40 per cent, a figure which would make even this lenient Government on takeovers and mergers balk at the prospect of allowing such a giant to be created. Bass has around 23 per cent and Carlsberg Tetley about 16 per cent of the UK market, compared to S&N's 30 per cent.
Moreover, there is a big geographical overlap between the two companies - principally in the Midlands and Yorkshire, where their combined market shares exceed 70 per cent in many areas. Bass has eight breweries and Carlsberg Tetley five; both have large sites in Burton-on-Trent.
One analyst said yesterday that the overlaps would lead to far bigger cost savings than those that resulted from S&N's purchase of Courage. Besides the Burton breweries, Bass and Allied also own sites close to each other in the North and Midlands. Bass has breweries in Birmingham and Sheffield, while Allied has sites in Leeds and Northampton.
The industry source said that any moves by Bass to strip out costs through closing breweries could cause alarm for the Government as the clock ticks away to the general election. "Time is not on Bass's side," he added.
The negotiations are also complicated because of the overlap in brands - particularly Carlsberg lager and Bass's Carling Black Label.
Carlsberg, the Danish company that teamed up with Allied, earns around 30 per cent of its profits from the UK and, according to sources, is adamant that it will ring-fence its trading position before giving its sanction to any deal.
Comment, page 17.