Green seeks to salvage bid for Arcadia

Philip Green, the colourful retail billionaire, was last night locked in talks with Baugur in an attempt to sign a complex agreement with the Icelandic company that would clear the way for Mr Green to make his £770m offer for Arcadia unconditional.

Mr Green's advisers, Merrill Lynch, have been trying to hammer out an agreement with Baugur's lawyers, Allen & Overy, since Saturday.

They are seeking to agree a framework which would see Baugur sell Mr Green its 20 per cent stake in Arcadia in return for him handing over the Top Shop, Top Man and Miss Selfridge chains which are currently in its stable.

Mr Green, who has a personal fortune of £1.2bn and owns Bhs, took only 45 minute to persuade his financial backers HBOS to provide extra credit so that he could buy Baugur's stake as well as the remaining equity in Arcadia.

But an agreement with Baugur itself has been very difficult to reach. Mr Green has pressed for Baugur to accept his promise to sell the three chains at a later date, while the Icelandic company has held out for a legal document which formalises the undertaking.

Mr Green is against this because he wants to make his offer for Arcadia unconditional in an attempt to win over Arcadia's board. Under Takeover Panel regulations, a formal side agreement with Baugur would require the consent of Arcadia's board.

The two sides are now working on an agreement whereby Baugur gives an irrevocable undertaking to sell its shares, and in return receives a letter from Mr Green saying he intends to sell the three chains. The letter will be non-binding in order to satisfy takeover rules.

Mr Green's advance on Arcadia was thrown into turmoil last Thursday when it emerged that Baugur was being investigated for an alleged fraud. Until that point Mr Green had been working with Baugur. But, having been surprised and angered by the fraud investigation, Mr Green decided to restructure his offer so that it did not rely on Baugur.

Arcadia is also enthusiastic about Mr Green's offer becoming unconditional, as it has been in takeover talks before with Baugur, which fizzled out in February because the company could not raise enough cash.

Arcadia, which has seen a dramatic recovery in its fortunes in the past year, may still not recommend Mr Green's raised cash offer of 408p a share, as it is at a discount to the retail sector.

Mr Green would not comment on the talks with Baugur, but is understood to be very confident about his financial backing. As well as the finance agreement with HBOS, Mr Green has the option of calling on Tom Hunter, a Scottish mutlimillionaire and long-time friend, if he needs extra cash.