Property deal creates £2bn West End giant

Derwent Valley will create a property giant in London's West End after agreeing to buy London Merchant Securities for £1bn. The deal ended rival bid interest from Great Portland Estates, which said it had pulled out.

The combined business, to be renamed Derwent London once the deal completes, will control property worth £2.25bn. Two thirds of its portfolio will be in the West End theatre and restaurant district where office rents have been rising well ahead of the wider market. Prime commercial floor-space in the West End area currently costs as much as £100 per square foot.

The deal bolsters Derwent's development pipeline that analysts argued had begun to look threadbare. London Merchant's buildings include the site of the new headquarters of the rum giant Bacardi in Dorset Square, the Angel Centre in St John Street and the Qube complex in Fitzrovia.

Derwent will offer 10 new shares for every 67 London Merchant shares and has also offered a cash alternative. If the maximum number of shares are issued as a result of the deal, London Merchant shareholders will own around 48 per cent of the merged company. Factoring in debt and other London Merchant liabilities, Derwent is in effect paying £2bn for its rival.

The Rayne family owns around 38 per cent of London Merchant's stock. Robert Rayne, the chief executive, will become the chairman of Derwent London. Mr Rayne's father purchased the company in 1958 and support from the Rayne family was key to Derwent's successful bid.

London Merchant shares have surged nearly 50 per cent over the past six months on takeover speculation and closed at a record high of 288.5p.