John Burns’ Derwent Valley has swooped to buy London Merchant Securities to create a £2.25bn central London development specialist and beating another takeover attempt by Great Portland Estates

Derwent Valley and LMS announced this morning that they have agreed to merge to create the Derwent London Group, which will own property assets comprising more than 5.6m sq ft (520,252 sq m).

The proposed merger between Great Portland Estates and LMS is now off. In a statement, Great Portland Estates said: ‘GPE was only interested in a transaction which would have been value enhancing for GPE's shareholders and accordingly is no longer considering a possible offer for LMS.’

Robbie Rayne, LMS chief executive, will become chairman of the board of Derwent London and John Ivey, chairman of Derwent, will become deputy chairman. John Burns, managing director of Derwent, will become chief executive and lead the Derwent London Group.

Nick Friedlos, LMS finance director, will join the board as an executive. Simon Silver, Derwent's head of development, will become head of development of the Derwent London Group.

Around 61% of its assets are in London's West End and 23% on the City of London fringes. There is a combined project pipeline of 5.2m sq ft (483,091 sq m), of which 1m sq ft (929,022 sq m) is expected to be completed by 2008.

The two companies said the Derwent London Group would be well positioned to convert into a REIT.

The transaction represents a premium of around 24% above LMS's closing price of 240.2 pence as at 29 September 2006, the last business day before LMS announced that it was in merger discussions.

It represents a premium of around 5% over LMS's closing price of 283 pence as at 13 November 2006, the last business day before the announcement.

The LMS directors, the Rayne family and certain related trustees and executors, representing approximately 37% of the LMS shares in issue, have undertaken to vote in favour of the scheme.

Rayne said: ‘LMS has strong and unique land holdings with substantial potential in areas very complementary to Derwent's existing portfolio and pipeline.

‘The combined business, with its enlarged scale and focus on central London, has excellent growth prospects and I am confident our shareholders will maximise value through this merger.’

Burns said: ‘By combining our companies, we will create a new force in the central London office market and particularly the 'mid-market' niche in which we specialise.

‘With our proven development and management skills, our highly complementary properties and landholdings and our strengthened financial firepower, we are uniquely placed both to capitalise on the substantial opportunities within the existing portfolios and to undertake larger acquisitions and development projects than before.’

UBS Investment Bank is advising Derwent; Rothschild is acting for LMS; JP Morgan Cazenove is acting as joint financial adviser and broker to LMS.