HOUSE Of Fraser, the department store chain that owns Jenners in Edinburgh, yesterday confirmed it is in talks with Icelandic investment group Baugur over a potential GBP350m cash takeover.

House of Fraser said that Baugur has made a preliminary offer of 148p per share, but cautiously noted the process "remains at an early stage".

It added: "There can be no certainty as to whether any formal offer will be forthcoming."

The statement was made following a report that Baugur had been given access to House of Fraser's books to start due diligence.

Sir Tom Hunter, the wellknown Scottish businessman, is a close personal friend of Baugur supremo, Jon Asgeir Johannesson, and they often back each other's deals.

It is thought Hunter is not yet involved in the process, and will decide whether to take a stake when the due diligence is finished. Baugur is understood to be a couple of weeks into a six week due diligence process.

Hunter and Baugur previously teamed up for an unsuccessful tilt at House of Fraser in 2002, when Hunter had an 85p bid rejected.

Both parties also joined forces earlier this year for the GBP445m acquisition of Wyevale Garden Centres for Hunter's West Coast Capital business.

Despite being given clearance to look at the House of Fraser books, it is not yet clear whether Baugur will be able to convince shareholders to back a bid pitched at 148p.

Robin Geffen, of Neptune Asset Management, has urged investors to reject any bid below 200p, or GBP470m, saying they should hold out and back the current management team, led by Scots-born John Coleman.

However, some analysts believe shareholders should accept a bid around the 150p mark.

Richard Ratner, an analyst at Seymour Pierce, said: "We have been expecting an offer to emerge at this level since Baugur bought a 9.5per cent stake in a dawn raid.

"We believe that Baugur is extremely serious, but the one caveat that we have is that there isa lengthy due diligence process and, in the meantime, plenty of water can flow, or otherwise, under the bridge."

House of Fraser confirmed at the end of last month that it was in talks with Baugur.

The Icelandic group had earlier prompted some takeover talk after buying a 9.48per cent stake in the stores chain for around GBP29m. That sent shares to an eight-year high of 135.25p - just above the 135p Baugur paid for the stake.

The share purchase marked the second time in three years that Baugur has taken a share of the department store group, although it sold its previous holding a couple of years ago.

If Baugur pulls off its swoop for House of Fraser, it will consolidate its position as one of the prime movers on Britain's high street.

Baugur owns tea and coffee vendor Whittards of Chelsea, it holds a 10per cent stake in Woolworths, and owns a number of clothing brands that House of Fraser stocks, such as Karen Millen and Whistles. It also owns London toy store Hamleys, and the Iceland supermarket chain.

House of Fraser has been the subject of intense bid takeover speculation in recent months with private equity group Apax Partners linked to an approach before Baugur.

House of Fraser owns 60 stores around the UK, including Glasgow, Edinburgh and Leeds, as well as a branch in Dublin. It posted a 4.6per cent rise in pre-tax profits last year to GBP27.3m. Seymour Pierce is forecasting that figure will rise to GBP29.5m this year.

Shares in House of Fraser closed 8.25p, or 6.4per cent, up at 137p.