TOKYO Hitachi Ltd (6501.T) and Mitsubishi Heavy Industries (7011.T) will likely suspend talks to combine some infrastructure-related businesses, and chances of a full merger appear slim, sources with knowledge of the matter said.
The suspension of talks comes after news first surfaced on Thursday that the two firms were discussing the combination of some businesses such as next-generation power operations and smart grids, with an eye toward a possible merger further down the road.
Three sources told Reuters that talks had stalled due to a difference in stance between Hitachi, which is keen to explore a full merger, and Mitsubishi Heavy, which only sees merit in combining select operations.
No one at Hitachi, Japan's largest electronics firm, or Mitsubishi Heavy, the country's top heavy machinery maker, could immediately be reached for comment.
A merger would create a $150 billion revenue infrastructure firm second only to General Electric (GE.N) and could provide impetus for cost cuts essential if the two companies are to cope with a strong yen and fierce global competition.
But any momentum behind the deal appeared to fizzle quickly on Thursday. Soon after media reported the news and Hitachi's President Hiroaki Nakanishi said an announcement would come later in the day, both Hitachi and Mitsubishi Heavy officials denied the talks and no announcement was made.
Hitachi, a sprawling conglomerate that makes products ranging from rice cookers to nuclear reactors, excavators, lawn mowers and computer chips, projects annual sales this business year of 9.5 trillion yen. It employs 360,000 people.
Mitsubishi Heavy is Japan's leading aircraft builder, defense contractor, a major shipbuilder and the lead system integrator for Japan's space program. A major partner of Boeing Co (BA.N), it has annual sales of about 3 trillion yen, with 69,000 workers worldwide.
Both firms make nuclear reactors, a key target area in the discussions on infrastructure-related operations.
A combination would give Hitachi, which makes boiling-water reactors, access to Mitsubishi Heavy's pressurized-water reactor technology, which has become the technology of choice for countries around the world.
But for Mitsubishi Heavy, the advantage would be solely in the scale afforded by a combination, which could help it better weather an industry downturn as nations around the world demand more stringent safety requirements in the wake of the Fukushima nuclear power plant crisis.
While it now appears unlikely, a full merger between Hitachi and Mitsubishi Heavy would be of unprecedented scale for non-financial firms in Japan.
According to Thomson Reuters data, a takeover of Mitsubishi Heavy including its debt could cost Hitachi around $28 billion, topping Softbank's (9984.T) $17.5 billion purchase of Vodafone Group's (VOD.L) Japan unit in 2004.
(Reporting by Taro Fuse, Taiga Uranaka and Kentaro Hamada; Editing by Will Waterman)