Kirkham facing failure in his bid to rearrange the furniture at DFS

Lord Kirkham's £496m bid to take full control of DFS Furniture, the retail chain he founded in 1969, is understood to be on the brink of collapse.

The chairman of DFS is keeping quiet about what he will do next after two leading shareholders, M&G and Morley, refused to back the offer last week. Other investors are also known to have said privately that they will not accept Lord Kirkham's bid.

M&G and Morley own more than 14 per cent of DFS. Lord Kirkham has a 10 per cent stake, but he cannot vote and the deal can be blocked if 25 per cent of shareholders veto it at an extraordinary general meeting on 7 September. Shareholder groups Pirc and the National Association of Pension Funds are also encouraging their members not to back the deal.

An insider close to Lord Kirkham said: "Everyone is trying to decide what he will or won't do. It's a big poker game. He's only got a few options, though: he can walk, be voted down, up his offer or hold his ground."

Speculation had been mounting that he might increase the offer or allow investors to keep the 17p final dividend.

But City sources believe the bid is unlikely to succeed regardless. Said one: "There's a lot of talk surrounding the deal. It's a pretty fair offer - it's not great, but it's not rubbish. But investors have seen too many retail companies go at a cheap price."

A number of retailers have been taken private but a backlash appears to be under way, with Marks & Spencer and WH Smith both seeing off suitors in recent weeks.

Other concerns include a 10 per cent pay rise awarded to Lord Kirkham and backdated to 1 December 2003, despite DFS warning that profits would fall almost 10 per cent in the face of stiff competition. Doubts have also been cast over the independence of the non-executive directors who are recommending the bid.

Said the City source: "There's a right way and a wrong way to run a deal and this is definitely the latter. I don't see Kirkham succeeding."