The merger, due to be announced tomorrow or Monday, will create a combined group with sales of pounds 10bn a year, a workforce of 70,000 and liquid steel production of 22.5 million tonnes, putting it a close second to Europe's biggest steelmaker, Usinor-Sacilor.
British Steel said any merger would be accompanied by a "return of value to shareholders". Analysts have pencilled in a share buy-back or special dividend worth up to pounds 400m.
However, unions immediately voiced fears about the threat to jobs at British Steel, which is already reducing its 37,000-strong UK workforce by 12,000.
Confirmation of the talks between the two companies sent British Steel shares surging to a 12-month high of 161.75p. The 21 per cent increase in its share price yesterday was the biggest one-day rise since the company was privatised in 1988.
A merger would go some way towards addressing the financial problems of British Steel. Weak prices, the strength of sterling, overcapacity and steel dumping by producers in the Far East and Eastern Europe have produced losses of up to pounds 200m in the year to April.
Although presented as a merger, the deal would be a takeover of Hoogovens by British Steel, which is three- times the size of its Dutch counterpart. British Steel is valued at pounds 3.2bn while Hoogovens was worth 1.52bn euros or pounds 973m when its shares were suspended on the Amsterdam bourse yesterday.
British Steel has net cash of pounds 432m and shareholders' funds of pounds 4.6bn and so could easily afford to finance the acquisition of Hoogovens with debt.
A merger with Hoogovens would offset some of British Steel's exposure to currency fluctuations and move it deeper into Europe. Currently, a third of its output of 16.5 million tonnes goes to Europe where steel is sold in deutschmarks. Every 10 pfennings that the pound rises against the deutschmark reduces British Steel's profits by pounds 100m. However, unions are fearful of the impact on jobs. British Steel has shed 5,000 employees in the last two years and plans a further 7,000 by 2002.
Ken Jackson, general secretary of the AEEU engineering union, said after a meeting yesterday with British Steel executives: "Our chief concern is employment security and we will be having urgent talks with British Steel."