Sumitomo Construction Co. and Mitsui Construction Co. admitted Tuesday that they are discussing integration of their management.
If realized, the tieup would create the nation's seventh-largest construction company, with annual sales of 765 billion yen.
Both companies denied a newspaper report that Fujita Corp., another ailing construction firm, is in on the talks, saying there are no plans for a three-way corporate merger.
"It is true that (Sumitomo and Mitsui) started talks for future corporate integration, but details have yet to be decided," a comment released Tuesday by Sumitomo Construction said. "As for an article on corporate integration with Fujita, there is no fact in that report."
Chikage Ogi, minister of land, infrastructure and transport, welcomed the move as a way of ensuring "more efficient and stronger management" of the firms.
"I think it will help new development of the (construction) industry," Ogi said.
The main banks of the two construction firms -- Sumitomo Bank and Sakura Bank -- merged into Sumitomo Mitsui Banking Corp. in 2001. The merger talks have apparently been led by SMBC, with banks under increasing pressure to get rid of construction firms' problem loans.
Both have been recent recipients of bailouts. Mitsui Construction, in fact, has only just scraped by since March, when creditor banks, including Sakura Bank, renounced loans totaling 142 billion yen. In 1999, Sumitomo Construction received a capital injection through a third-party allotment of 12 billion yen but is still suffering from interest-bearing loans of 309.4 billion yen.
Mitsui Construction, which has a strong foothold in condominium construction, posted group sales of 414.7 billion yen for fiscal 2000, with net losses of 20.9 billion yen. It has about 3,200 employees.
Sumitomo Construction posted sales of 350.4 billion yen for fiscal 2000, with net losses of 1.9 billion yen. It has about 3,000 workers.