Caffè Nero, the independent coffee-bar chain, has upped its stake in the loss-making group Coffee Republic, sparking takeover speculation.
The group, which now holds a 10% stake in Coffee Republic, began building up shares last week after an announcement that it had secured a further £7m of bank funding to continue its expansion.
Coffee Republic issued a statement confirming that a takeover approach had been made but declined to identify the bidder.
Last month, it called a halt to its expansion following losses of £7.5m in the year ended 31 March.
Gerry Ford, chairman of Caffè Nero, claimed that the company had not yet decided what its intentions were towards Coffee Republic.
Caffè Nero has £10m available for growth. Without the extra money, said Ford, the group was able to open two shops each month for the next 12 months. Openings, he said, would be concentrated outside London.
He said: "I would not say that London is saturated, but growth is slower, and it's a much tighter market."
This is not a view held by City analysts. Stuart Price of WLB Panmure described the coffee-bar market as "fragile".
"When you calculate their returns, they are remarkably low," said Price. "They would get a better return by putting their money in the bank."
Other investors in Coffee Republic include Julian Richer, the hi-fi retailing tycoon, who has a 16% stake. by Christina Golding