Shares in Australian agricultural business Elders hit a one-year high after it confirmed an approach from rival RuralCo, its biggest shareholder, over "a merger proposal".

Rumours of a potential tie-up between the two companies have been circulating since RuralCo took a 10% holding in Elders four months ago, a stake it has increased to 12%.

This speculation gained some foundation on Thursday when Elders acknowledged that it had received an invitation from RuralCo managing director John Maher for talks on "the potential for a transaction opportunity".

RuralCo said that the tie-up was based on deal which would involve a cash call on shareholders, the merger of rural services businesses and disposal of Elders' other interests.

'Consider its options'

But Elders chief executive Malcolm Jackman said that while the group "would obviously consider and evaluate any sufficiently-detailed proposal", the RuralCo proposal "was conceptual in nature and lacked sufficient detail".

And RuralCo trimmed expectations among Elders investors of a lucrative takeover pay-off by saying that it had suggested a deal "on a nil-premium basis" – and based on share prices before speculation of an acquisition took hold.

Nonetheless, Mr Maher added that RuralCo would "consider its options over the coming weeks".

Shares in Adelaide-based Elders touched Aus$0.295 in Sydney, their highest since October last year, before losing some ground to close at Aus$0.275.

The stock was standing at Aus$0.185, the lowest since at least the 1980s, before RuralCo revealed its Elders holding.

'Capital position not sustainable'

Elders shares have been under steady pressure over the past five years, during which the group has sold-off a series of assets, from banking to woodland, in an attempt to shore up its finances and improve a trading record marred by three successive annual losses.

In August, it revived plans to sell-off its car components business, and separately on Thursday revealed the Aus$3m sale of its 50% stake in the SmartFibre wood processing company.

RuralCo said that it believed that Elders "capital position is not sustainable", and said that a tie-up represented the "best alternative available" for the veteran feedlots-to-grain trading group to raise equity.

However, Mr Jackman said that RuralCo's interest "underscores the progress that Elders is making in its strategy to become a pure-play rural services business".

"Elders… believes that it has the capacity to create significant value for shareholders over time."