Wilson Bayly Holmes-Ovcon (WBHO) and Concor, two of SA's five largest listed construction companies, say they have started negotiations with a view to merging.
A merger would put them almost on par with the construction divisions of the two heavyweights in the industry, Aveng and Murray & Roberts.
WBHO financial director Angus MacKenzie said at the weekend that the talks were at a "preliminary" stage. He would not divulge further details.
Analysts did not expect a merger to have a substantial effect on the construction market, since the companies are "fairly small".
In the six months to December, WBHO generated R2,2bn in revenue. Concor's revenue was R738m.
A construction sector analyst questioned the prudence of the move by WBHO, the top-performing construction company in the previous reporting season.
"WBHO is in a sweet spot right now, they seem to have the magic formula," said the analyst, while Concor has not been among the best performers in the industry in the past few years.
The analyst warned that investor interest in well-liked WBHO could be diluted if the company were to merge with a weaker entity.
"But if they can buy Concor at a good price and turn it into another WBHO, that's great," he said.
Further consolidation in the sector would be welcome, said the analyst. But he said the most recent large merger in the industry - between Grinaker and LTA - had not been as successful as expected.
Another analyst said WBHO might be interested in Concor's manufacturing and mining activities - the group undertook extensive steel work and was a contract miner.
In addition, the analyst said, merging the two groups' construction activities could give them critical mass to undertake some of the large government infrastructure work that was expected to be generated over the next few years.
A merged entity could also attract greater investor interest, he said.
WBHO profits have been boosted handsomely by the boom in the South African building market for shopping centres and residential developments, driven by low interest rates.
Most of its counterparts were suffering from the dampening effect of the strong rand on large industrial and mining projects.
WBHO's after-tax income shot up 87% to R72m in the half-year to December last year, compared with the same period in 2003.
WBHO said in March that its order book - at just more than R4bn - was at its highest in the group's history as a listed company.
About R1bn of the R2,75bn increase in the order book came from Australian company Probuild Constructions, a group subsidiary.