Louis Dreyfus, the world's largest cotton and rice merchant, is in talks with Olam International over a merger which would create a $15 trading house, twice the size of America's Bunge.

Shares in Singapore-listed Olam soared 9%, taking its market capitalisation through $5bn (Sing$6.6bn), after it revealed that it was in "preliminary" talks with the French trading house over a "possible business collaboration".

The tie-up "may take the form of, among others, a merger".

The talks come amid moves to transform Louis Dreyfus which, 149 years after it was founded, is believed to be considering a listing or the sale of a stake to bankroll the next stage of its growth.

While the group has historically focused on trading, ranking third in corn, wheat and sugar, its $460m purchase last year of a stake in Brazilian ethanol producer Santelisa Vale is seen as a forerunner for more acquisitions in production assets, which potentially offer richer margins.

Indeed, a merger with Olam to create a listed company would offer Louis Dreyfus a fresh route for raising capital to back such expansion plans.

Levers of power

However, the prospects of an Olam deal, or any of the other options, face the challenge of occasionally difficult relations between Jacques Veryat, group chairman since 2008, and Margarita Louis-Dreyfus, the face of the founding family, who has expressed a determination to maintain family control.

The group, which achieved sales of $34bn last year and is estimated in the trade as worth more than $10bn, is still owned in the main by its founding family.

Olam "emphasised" that "discussions are still preliminary and that no definitive agreements in relation to the possible collaboration have been entered into… and the possible collaboration may or may not proceed".

'Makes sense'

Nonetheless, Olam shares soared to a fresh high Sing$3.22 at one point before retreating to stand up 6.8% at Sing$3.15 in late deals.

News of the talks was welcomed by DBS Vickers analyst Ben Santoso, who said that a deal between two competitors, which were the top two cotton traders, "would make sense".

"Olam has various overlapping businesses with Louis Dreyfus, thus strengthening the combined entities' global footprint and economies of scale in areas where they have overlap - such as cotton, sugar, and wheat - against larger rivals such as Cargill, Bunge, Noble or Archer Daniels Midland," Mr Santoso said.

Furthermore, a deal would create a group with more complete geographical spread, with Louis Dreyfus strong in the US, and Olam a big player in Africa.

However, he stressed the "speculative" nature of the talks adding that "Olam may not be the only party that Louis Dreyfus may be in talks with".