The latest all-share deal follows an initial £119m bid for the company by Costain last month which was rebuffed by Mouchel.

The improved offer has also left Mouchel unmoved.

The firm told the City this afternoon: “The Board of Mouchel confirms that, following consultation with its advisers, it has rejected Costain’s indicative conditional proposal on the basis that it significantly undervalues the business.”

A Stock Exchange announcement by Costain this morning said: “The Board of Costain considers the terms of the Enhanced Proposal to be highly attractive to both Mouchel’s and Costain’s shareholders.

“Under the Enhanced Proposal Mouchel’s shareholders would receive approximately 51.7% of the enlarged issued share capital of Costain.

“Mouchel’s shareholders would, therefore, own an increased equity interest in a well capitalised, enlarged business, with a clear strategy for future profitable growth.”

Costain chairman, David Allvey, said: “The Board of Costain continues to believe that there is a compelling strategic rationale for combining Costain and Mouchel and creating an enlarged group with enhanced critical mass to meet the customer trend towards larger and longer-term bundled solutions.

“We believe that the strategic case put forward in our announcement of 22 December 2010 has been well received by both sets of shareholders and further believe that today’s significantly enhanced proposal provides Mouchel’s shareholders with immediate value as well as future upside potential, allowing them to share fully in future value creation alongside Costain Shareholders.  Accordingly, we look forward to engaging with the Board of Mouchel as soon as possible.

“Our ability to formalise a proposal that is attractive to Mouchel’s shareholders and other Mouchel stakeholders and is recommendable by the Board of Mouchel is dependent upon gaining access to satisfactory due diligence in order to confirm our key assumptions, including those relating to synergies.”