The surprise move will create a new company called Costain May Gurney which will continue to be traded on the stock exchange.

Directors at both companies are recommending the deal which now needs full shareholder approval after winning support from major institutional investors.

Each May Gurney shareholder will receive 0.8275 of a new Costain share, or about 252 pence per share, a 37% premium to yesterday’s May Gurney share price.

The share deal values the Costain acquisition of May Gurney at £178m.

The merger will create a company with a turnover of £1.6bn which can bid for bigger contracts.

The new combined company will be 53% owned by former Costain shareholders with former May Gurney shareholders having a 47% holding.

The deal is expected to be rubber-stamped by early June.

The enlarged company will concentrate on the rail, highways, water, waste, airports, hydrocarbons, power, nuclear, local government and fleet management.

Costain’s board believes it can save at least £10m following the merger through shared back office functions with the loss of less than 150 jobs across both firms which would employ a total of 15,000.

The combined group will be led by current Costain CEO Andrew Wyllie as combined group CEO and current Costain Finance Director Tony Bickerstaff as the combined group Finance Director.

Costain’s David Allvey will be chairman of the combined group with May Gurney’s Baroness Maragret Ford as deputy chairman.

Allvey said: “The Costain strategy has been extremely clear: to become a leader in the design, delivery and maintenance of national infrastructure,

“The announcement today is a highly significant step in that process.

“Together with May Gurney we will have the added experience and skills to underline our leadership status and to provide a platform for new growth and success.

“We see this coming together of two established UK companies as good news for all of our stakeholders.

“Our customers are increasingly demanding a broader range of integrated services and this powerful combination will enhance our status as a Tier One engineering solutions provider.”

May Gurney issued a shock profit warning last September which saw its former chief executive Phllip Fellowes-Prynne leave the company.

Costain has been in the market for a major deal for some time after walking away from a £169m bid for Mouchel two years ago.