BRITAIN'S second largest pub group is in secret talks aimed at a £1.2bn takeover of the Pubmaster chain from Hartlepool.

Punch Taverns has identified the 3,200-strong pub company as a strong acquisition target in an industry that is consolidating at a rapid rate.

A source close to Pubmaster confirmed that Punch had been granted exclusive negotiation rights while it runs the rule over the Hartlepool firm's books.

A sale would be good news for Pubmaster's workforce, who are shareholders in the business. The company's management and staff jointly hold a 22 per cent stake in the business.

A source said: "They are talking at the moment. Punch is quite keen to spend its money and is pursuing Pubmaster but it is still at a fairly early stage.

"The exclusivity allows Punch to do further due diligence on Pubmaster, which may or may not lead to something at the end of it."

Punch raised £250m last month for the possible takeover by restructuring debt and selling new bonds.

Pubmaster is the third largest UK pub group and has experienced phenomenal growth, and strengthened its reputation as a good business, under the leadership of executive chairman John Sands.

It has been the subject of takeover talk for some time and in August was rumoured to be monitoring the movements of major shareholder Robert Tchenguiz, a Middle-Eastern property mogul who was looking to strengthen his 37 per cent stake in Pubmaster by buying German bank WestLB's 21 per cent shareholding.

Tchenguiz and WestLB are understood to have pre-emption rights on the sale of Pubmaster.

It is believed that Punch will have up to a month to decide if it will pay the anticipated £1.2bn price tag for Pubmaster. Punch declined to comment on the talks.

However, it said: "The current pubs market is extremely dynamic and Punch is an acquisitive company and, therefore, is always monitoring acquisition opportunities closely."

Pubmaster, Tchenguiz and WestLB were all unavailable for comment.

Punch and Pubmaster recently missed out on the lucrative 1,450 pubs, hotels and restaurants arm of Scottish & Newcastle (S&N).

A Sunday newspaper reported yesterday that the Spirit pub group had entered an exclusive agreement with the Edinburgh-based brewer.