Matalan in talks over sale of Lee Cooper

Matalan, the discount retailer at the centre of bid speculation, revealed yesterday it had received a takeover approach - but only for its Lee Cooper jeans subsidiary.

Matalan, the discount retailer at the centre of bid speculation, revealed yesterday it had received a takeover approach - but only for its Lee Cooper jeans subsidiary.

The group acquired Lee Cooper three years ago for £46m, but has never convinced the City of the merits of owning a denim manufacturer. Its shares rose 1.5p to 234p.

In a strategic U-turn, Matalan admitted yesterday it was in talks with a potential buyer. It stressed discussions were at an "early stage", but said it had given the other party "exclusive" negotiating rights.

A poor performance in Lee Cooper's key French market forced Matalan to restructure the operation, taking a £3m hit to its profits in the process and dragging the jeans maker into the red. Analysts estimate it lost about £800,000 during the first half.

When Matalan bought Lee Cooper from Bridgepoint Capital, in July 2001, it highlighted the need to guarantee access to the brand in an attempt to justify the much-criticised move. It was worried that another buyer might stop it from selling the brand. It is understood that Matalan will demand the UK distribution rights to Lee Cooper, which had sales of £57m last year, as a condition of any sale.

Analysts were divided on the likely sale price, given that the vast bulk of the purchase price was goodwill. Nick Bubb, at Evolution Beeson Gregory, estimated it could fetch about £20m. Gillian Hilditch, at Arbuthnot Securities, said: "It would seem on this basis that if a sale is agreed Matalan will be taking a significant write-down - something management may think worthwhile given the unit's loss-making status."

Speculation that Lee Cooper was up for sale first surfaced earlier this year, since when John King, the chief executive, has been careful to stress that the business is non-core to Matalan. Lee Cooper has suffered from the surge in popularity of own-label denim brands in France.

Richard Ratner, at Seymour Pierce, said the sale would allow Matalan to focus on improving its core performance. "This is a sensible move, if it comes off, as Matalan should not be involved in the vagaries of manufacturing itself," he added.

Two profits warnings either side of Christmas last year tipped Matalan into play as a takeover target. Wal-Mart, which owns Asda, is widely considered the most likely buyer, given that its UK supermarket chain is keen to expand its standalone clothing stores. But most analysts believe John Hargreaves, the chain's founder and controlling shareholder, would not consider selling the business until its trading performance picks up. Last month Matalan unveiled further evidence of a recovery, revealing underlying sales rose 4.5 per cent during its first half.