Defence equipment maker Chemring Group Plc said U.S. private equity firm Carlyle Group had been granted an extension to the "put up or shut up" deadline to make an offer for the British company.
The news sent Chemring's stock up 5 percent on Friday, indicating that investors were relieved the company was still in talks with the U.S. investment firm.
Shares in Chemring, which makes flares, equipment to detect improvised explosive devices and mechanisms used in ejection seats, have been under pressure after a profit warning from the company raised concerns that Carlyle might walk away.
"I thought it was fairly encouraging in some respects because they haven't actually walked away. Therefore, Carlyle thinks there's something to discuss," said Paul Mumford, senior investment manager at Cavendish Asset Management, which holds about 682,000 Chemring shares.
"My own stance is that I'm still sort of sitting tight awaiting developments," Mumford said.
Chemring had said in August that it received a highly preliminary expression of interest from Carlyle, sending the defence group's stock soaring.
Some of the gains were pared days later when Chemring cut its operating profit target for the year by 15 million pounds ($24.18 million).
Based on Thursday's close of 327.5 pence, the company is valued at 637.7 million pounds.
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The company said on Friday that Britain's takeover panel had extended the deadline for Carlyle until 1700 GMT on October 12 to "enable the parties to continue their on-going discussions regarding a possible offer".
The previous deadline was scheduled to expire at 1700 GMT on September 14.
Edison Investment Research analyst Roger Johnston sees the extension as a sign that Carlyle is trying to assess if the company's problems are temporary or part of a wider issue.
"With the complexity of the group, we are not surprised this is taking longer than the original deadline and the answer to this question will determine whether a bid materialises at all and at what price," Johnston said in an emailed comment.
Chemring and its peers are facing lower defence spending in the United States and Europe as governments tighten their belts in an effort to rein in budget deficits and analysts have flagged the possibility of consolidation in the sector.
The threat of a second round of cuts to U.S. defence spending under a process known as sequestration has further weighed on investor sentiment.
Dealmaking in the sector took off earlier this week, when BAE Systems Plc and Airbus parent company EADS disclosed they were in advanced talks over a merger deal.
Edison Investment's Johnston said the extension to the "put up or shut up" deadline would provide rivals such as ATK and Esterline with more time to consider a bid. He does not expect large defence companies to bid for Chemring.
"However, the likelihood of a trade buyer emerging ahead of the U.S. election and the outcome of sequestration is much reduced, part of the reason for Carlyle's timing in my view."
Shares in the company were up 5 percent at 342.94 pence at 0754 GMT on the London Stock Exchange on Friday.
This article is copyrighted by Reuters
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