Lucas confirms talks of possible link with Varity

Lucas Industries is in "preliminary talks" with Varity Corporation of the US which could lead to a link-up between their car brake divisions or full-blown merger of the two companies.

A merger would create a global auto parts maker with a market capitalisation of nearly pounds 3bn and sales of pounds 4.7bn.

The announcement was prompted yesterday by weekend press speculation that Lucas was planning to merge its foundation brakes business with the anti-lock braking systems manufactured by Kelsey-Hayes, part of Varity.

Lucas emphasised that "discussions are in a very early stage and there can be no assurance that any agreement will be reached".

The talks could mean Lucas has given up on its previous efforts to buy Carlo de Benedetti's 30 per cent stake in Valeo, the giant French car components maker. Lucas refused to comment.

The company will also need soon to find a successor to George Simpson, who steps down as Lucas chief executive next autumn. One name in the frame is John Towers, who resigned as head of Rover last week.

The talks with Varity are seen by analysts as another sign of global consolidation in the auto parts industry, increasingly dominated by a few main suppliers.

Whether the talks succeed or not, Lucas will still seek a buyer for its aerospace division, worth about pounds 600m, according to analysts yesterday. Mr Simpson's revival strategy is seen to be still incomplete as far as most City opinion goes.

Components companies are on a merger binge. In February, AlliedSignal of the US agreed to sell its anti-lock and hydraulic-brake business to German conglomerate Robert Bosch, for $1.5bn.

"The business is consolidating pretty rapidly these days,'' said Ross Seymore, an analyst with First of Michigan Corporation in the US. He added that the industry was moving toward having a few big suppliers for each system, such as brakes, wheels or interiors. These would have the resources to follow big car makers in their expansion world-wide.

Lucas's shares last traded on Friday, falling 5p to 208p.

Varity's businesses include VarityKelsey-Hayes, the world's largest maker of rear-wheel and four-wheel anti-lock braking systems. Its VarityDaytonWalther unit makes wheel and brake components for trucks and trailers.

Varity had sales last year of $2bn. Its other businesses include VarityPerkins, a maker of diesel engines, and VarityZecal, which makes copper-to-ceramics bonding products used for electronics.

Lucas supplies parts and systems to the auto and aerospace industries and makes disc and drum brakes for auto makers world-wide. Its car disc brakes are the most widely used in the world, it says.

Lucas also makes diesel systems, electrical and electronic systems for the auto industry and replacement parts for the car after-market. The company has annual sales of about $4.5bn.