* Biggest rival makes takeover approach
* Offer could take the form of Segro shares
* Brixton shares rocket by a fifth by 0951 GMT
* Brixton 2010 stg bond trading at 80 pct of face value
(Adds analyst comments, bond details)
By Sinead Cruise
LONDON, May 22 (Reuters) -Industrial property landlord Segro has made a takeover approach to its smaller indebted rival Brixton, in a move that could spark the first merger in Britain's real estate investment trust (REIT) sector.
Shares in Brixton, which owns large chunks of industrial and logistics property close to London's Heathrow Airport, surged 22.6 percent to 61 pence by 0951 GMT amid investor hopes Segro could be the white knight to soothe its escalating debt woes.
The spike in Brixton's share price equates to a market capitalisation of about $226.6 million, Reuters data shows.
Segro shares were trading down 2 percent to 24.5 pence, off an earlier high of 26.53 pence on robust volume.
Segro, which managed to raise 524 million pounds ($827.7 million) in a 12-for-one rights issue in March, said it envisaged any potential offer to be in the form of Segro shares. It reserved the right to consider other deal structures.
Earlier on Friday, Brixton said it was in takeover talks with a small number of potential suitors, Brixton described the discussions as at a "very early stage" and said there could be no certainty an offer would result.
Daniel Horwood, property analyst at Singer Capital Markets, told Reuters a Segro share-for-share bid stood "a good chance of success relative to other/cash bidders", noting Brixton's financial position provided for "a very wide range of outcomes".
Brixton reported a 47 percent slide in net asset value per share to 290 pence a share in its full-year figures on March 16. Its property portfolio was valued at 1.8 billion pounds at December 31, 27 percent lower than the previous year.
Its biggest shareholders include the Government of Singapore, UBS Global Asset Management, APG Asset Management, Scottish Widows Investment Partnership and Aberdeen Asset Managers, who together hold about 30 percent of the company's stock, Reuters data showed.
British insurer Legal & General almost doubled its stake in the company in March to just under 4.1 percent.
Brixton has been hit hard by an intense UK property correction, which has so far wiped more than 40 percent of average commercial real estate values since June 2007.
The majority of property companies, including British Land, Land Securities and Liberty International have conducted hefty share sales to raise funds to reduce pressure on loan-to-value covenants.
Brixton is yet to tap shareholders for new funds, preferring instead to sell assets and ramp up letting activity to reduce its debt burden. Earlier this month, Brixton said it had sold four properties to AEW Europe for 70.25 million pounds.
Following advice received in relation to its unsecured bonds, Brixton said its gearing covenants will be tested on the basis of the net assets published in the half-year results at June 2009, instead of December.
It said it remained focused on mitigating the risk of any covenant breach and continues to review options to provide additional financial flexibility.
These include a restructuring of debt arrangements, a potential equity raising and further asset disposals.
Brixton's sterling bond, maturing in 2010, traded at 80 percent of face value on Friday as news of the approach broke, one credit analyst, who declined to be named, told Reuters. Reuters data showed the bonds were bid at 72 percent of face value on Thursday.
"That bond has been trading all over the place. Either it gets refinanced at par or it will come to a standstill and the debt is restructured," the analyst said.
"If Segro take them over, that would mean they are much more likely to refinance at par so that would be good for the bonds," the analyst added.
The company's 2015 sterling bonds were indicated bid at 64 percent of face value, while its 2019 sterling bonds were indicated bid at 60 percent of face value, the analyst added.
Brixton's shares have plunged more than 80 percent in the past 12 months. It is being advised by Nomura International and Citigroup Global Markets. (See www.reutersrealestate.com for the global service for real estate professionals from Reuters) ($1=.6331 Pound) (Additional reporting by Natalie Harrison) (Editing by Rupert Winchester and Andrew Macdonald)