The Irish Agricultural Wholesale Society Limited, the co-op that owns 17.4 per cent of IAWS plc, has departed from its passive investment strategy by entering "merger" talks with Cork-based services firm SWS.

The two companies confirmed yesterday that they were talking about "merging key components of their respective businesses" but declined to expand on the exact nature of the discussions.

They said the matter was subject to due diligence and the agreement of a business plan for the combined entity.

In a statement, the IAWS co-op said it was planning to "pursue a number of opportunities by way of merger or acquisition to further develop its business".

It said this may involve a change to its corporate status.

The development prompted speculation in the market over the future of the co-op's stake in IAWS plc, the food and agribusiness group that yesterday reported interim results.

Comment centred on how the co-op might fund its strategy shift, with the market noting that its shares in the plc are now worth some €210 million. A spokesman for the society said it would have a "range of options" for funding should the need arise.

Mr Owen Killian, chief executive of IAWS plc, yesterday said the co-op had been a "very responsible shareholder at all times". He highlighted the society's stated commitment to avoiding direct competition with the plc.

SWS, the Cork firm with which the IAWS co-op is holding talks, is owned by four co-ops, including the Dairygold Agricultural Co-operative Society. All four co-ops are also shareholders in IAWS plc, although the two merging entities have no holdings in each other.

The IAWS co-op is controlled by more than 40 small co-ops in Ireland. It has annual turnover in excess of €70 million and employs 500 staff. SWS recorded pre-tax profits of €2.8 million on turnover of €15.4 million last year.