Distribution group Allegro is in exclusive talks with a subsidiary of Fyffes about a merger of its food and non-food grocery distribution arm. It is understood that talks are at an advanced stage and a deal could be signed within the next month.

Talks are taking place with Gillespie & Co, a distribution company which is 90 per cent owned by Fyffes, the banana importers. Gillespie's distributes Fyffes goods.

Mr Dermot Divilly, Allegro's chairman, would only confirm that the company was in talks about the future of the division which includes distribution of the Kimberly Clarke hygiene products. The turnover of this division is said to be around £100 million a year, more than half total group turnover. A spokesperson for Gillespie said the company did not comment on speculation. However, sources said the talks were taking place with a view to merging the operations. The exact shareholdings are still under discussion and a source denied that it would involve a cash exchange. One source said the make-up of the group might eventually include a third distributor. Gillespie is believed to have an annual turnover in excess of £25 million, employs 31 people and is based in Dublin.

The move to merge is being forced by changes in the distribution sector, changes which industry sources say have been taking place for several years. Supermarket groups such as Tesco, Dunnes Stores and Superquinn, as well as Musgrave, have moved towards centralised distribution systems. This has put independent distributors under pressure and is forcing consolidation in the sector as it reduces the amount of deliveries shops need.

Allegro was once tipped as a company set to go public but has had mixed fortunes in recent years during which various parts of the group have been sold off. Allegro suffered a severe body blow when it lost the Procter & Gamble account, which had been worth in excess of £50 million a year, to Johnson Brothers. At one stage Allegro's turnover had exceeded £200 million.

In February, Allegro sold its subsidiary Tennant & Ruttle Distribution Ltd to a management buyout team for an undisclosed figure. It had bought Tennant and Ruttle along with another company, JC Distribution, from James Crean in 1994 for £6.6 million.

Shareholders in Allegro include Mercury Asset Management (35 per cent) and venture capital group ACT (20 per cent).

Last December Allegro was reported to be in talks with Tesco, with a view to a link-up, but nothing came of it.

Sources said Tesco had put the management of its distribution system out to tender, but that Allegro had not tendered for it. Tesco is investing around £30 million in its own distribution systems.

Ms Mary Brophy, editor of Check- out magazine, said yesterday that Gillespie had the advantage of 32-county distribution, but that it delivered many secondary brands.

However, it does distribute well-known brands such as Milupa (baby products), Henara (hair colour), the Tex-Mex range of sauces and Hermasetas (low calorie sweetener), she said.

Ms Brophy said centralised distribution by the major supermarket chains and Musgrave Cash & Carry meant that these groups would account for about 70 per cent of the market within the next few years. This was putting pressure on companies such as Allegro to consolidate.