Cambian shares surged 33% after the social care services firm confirmed it had received a potential takeover offer worth £405 million.
The two firms are now "in discussions" after CareTech made a preliminary offer comprised of 77p per share in cash and an exchange of 0.348 of a new CareTech share for each Cambian stock.
It effectively values each Cambian share at 220p each, though a full cash alternative has been floated at 200p per share.
CareTech said it was now "in discussions" with Cambian's board regarding the possible offer.
The news sent Cambian shares up more than 33% in afternoon trading at around 198p per share.
Both firms stressed that there was no certainty that a firm offer would be made.
A deadline for a formal bid has been set for 5pm on August 7.
The statements follow media speculation, with Sky News first reporting the prospective takeover.
The report suggested that had been rejected by Cambian's board despite finding support among investors.
Cambian - which is a children's specialist education and behavioural health service provider - employs around 4,300 people across 224 residential sites, special schools and fostering offices across England and Wales.
Cambian logged a £9 million pre-tax loss in its most recent set of annual results, having narrowed from a £37.4 million loss a year earlier.
That was against an 8% rise in revenue to £196 million, which was thanks to an increase in average fee levels amid a move to "higher severity services".
The takeover would see it come under the umbrella of CareTech, last reported as having more than 5,000 staff.
Caretech provides services for people with adult learning capabilities as well as foster care and residential services for young people.
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