Graeme Evans

Construction firms Bellway and Redrow were yesterday the subject of speculation about a £1.3bn merger to create one of the UK's biggest housebuilders.

According to one report, Bellway has approached Redrow with a view to carrying out an all-share merger between the country's fifth and seventh-biggest housebuilders in terms of stock market value.

It is thought to be the second time that Bellway, the larger of the two firms with a value of £824m, has approached Redrow about a tie-up.

The reported move comes at a testing time for the sector as firms feel the pressure from a slowing economy and tighter mortgage market. Persimmon, which is the sector's largest firm with a market value of £1.7bn, recently said revenues were down by a quarter in the year to date.

If the combination goes ahead it could reopen consolidation in the sector after Taylor Woodrow and Wimpey created the UK's second- largest firm last year. While Bellway is the larger firm by market value, Redrow is thought to boast a bigger holding of future plots - estimated at around 25,700.

Bellway, which was founded in 1946 and employs more than 2000 people, said in March that it was facing "difficult times" in the housing market as it unveiled a 3.9% drop in interim pre-tax profits to £96.9m.

However, the firm said its strategy of forward selling helped soften the blow of a tougher market, with £670m worth of forward orders so far secured - 88% of its revised annual target for the whole financial year.

The Newcastle-based firm said the market was particularly challenging in the Midlands, Yorkshire and the north-west. It has sought to tempt buyers with incentives, such as carpets and curtains in the sale price.

Flintshire-based Redrow's pre-tax profits from continuing operations for the six months to December 31 dived to £35.8m from £54.7m. Total house sales for the period were 2111, down 4.7% year-on-year.

Commenting on the results, analysts at Landsbanki described Redrow as a "weak player in a tough market", and suggested the firm was open to a takeover.