Lucas nearer Varity merger

Lucas yesterday moved a step closer to a pounds 3bn merger with Varity Corporation of the US, after a board meeting gave its blessing to the next stage of negotiations on the financial details.

Lucas said in an upbeat statement - put out to prevent a false market in the shares after rumours of an imminent announcement - that talks with Varity were "proceeding well".

The car components and aerospace company confirmed reports that the state of play would be discussed at the board meeting but played down speculation about an early announcement and said the meeting was not a make-or-break affair.

A spokesman said an announcement was unlikely before early June, which puts a deal at least a week away.

However, it is clear that the boards of Lucas and Varity have reached broad agreement on the basic industrial logic of a merger, which would produce one of the world's biggest brake suppliers.

Lucas's brakes division would be combined with Kelsey-Hayes, Varity's brakes subsidiary, which recently built a plant in the Netherlands to gain a foothold in the European market. Lucas's aerospace division would remain in the enlarged group, ending the company's previous search for a buyer, and so would Perkins, the diesel engine manufacturer owned by Varity.

The two sides are also thought to have agreed that Sir Brian Pearse, the chairman of Lucas and former chairman of Midland Bank, would remain as chairman after the merger, and that Victor Rice, the British born chairman and chief executive of Varity, would be chief executive, replacing George Simpson, who is leaving to run GEC.

A key issue to settle is the terms of the share swap for the all paper deal, which is expected to exclude any cash for shareholders, disappointing City institutions.

Lucas plans to sell the merger on the basis of the benefits of bringing two complementary companies together, giving Lucas greater access to the US and Varity a better platform in Europe.

There were suggestions that Lucas was holding out for a 65:35 split, giving Lucas shareholders the more powerful stake in the new company, but Mr Rice is certain to demand a better deal to give Varity shareholders greater weight.

After speculation in the stock market that an offer was imminent, investors were unimpressed with Lucas's promise of silence for at least a week, and the shares slipped 2p to 235p.

Another disappointment was the absence of any sign of other suitors for Lucas, including the rumoured TI, Siemens, GKN or General Motors.