Australia's second largest winemaker Southcorp is set to merge with the privately-owned Rosemount Wines in a A$1 billion deal, the Australian Financial Review reported today. Rosemount is the fifth largest Australian winemaker and the new company will be the country's largest wine producer with sales of around A$1.3bn.

The Review cites industry sources and said Rosemount is worth A$1.5bn while Southcorp has a share market capitalisation of A$3.8bn.

Southcorp has been the centre of merger speculation for the last six months and, as reported last year, was the likely takeover target of the world's drinks multinationals that are looking to expand their wine portfolios.

Allied Domecq and Diageo headed the list of predators. And, if the merger takes place, it could be seen as a ploy to thwart a takeover bid from these UK-based giants.

Southcorp has been particularly vulnerable to a bid since it sold off its Asian packaging division, which left it cash heavy. The company is also in talks to dispose of its North American packaging division, which could be completed by the middle of this year.

A Southcorp/Rosemount merger would be just the latest move in a flurry of consolidation activity involving Australian wine firms. Foster's-owned Mildara Blass recently acquired the US producer Beringer while Rosemount itself entered a winemaking joint venture with Robert Mondavi the Californian industry stalwart.

A Southcorp spokeswoman declined to comment but Rosemount denied the rumours to saying: "This is just speculative rumour, the Oatley family [Rosemount's owners] have been in the wine business for 30 years and will continue to be in that industry for many years to come. The family has reassured the company that this is not going to happen."