Green's unpleasant land beckons for Rose's Arcadia

If Bhs snaps up its retail rival, it could also spell the end of a beautiful friendship

The last time Arcadia chief Stuart Rose met Philip Green at a major social engagement, the Bhs boss was dressed as the Roman Emperor Nero. It was Green's 50th birthday party and the brash retailer had thrown a lavish £5m toga party in Cyprus to celebrate. While Rose – smooth and urbane – is perhaps the polar opposite to the rough-and-ready Green, they are good friends.

But some five months after the party, their friendship is being put to the test. Earlier this month Green made a £720m cash offer for Arcadia, which owns chains such as Top Shop, Dorothy Perkins and Burton Menswear. The offer was swiftly rejected by Rose and his board as "inadequate", so the possibility of a showdown between two of Britain's most successful businessmen now looms.

"The party? Yes, it was fun," says Rose. "Philip and I are friends. He's a good bloke. He's funny and shrewd. I see him socially and we speak fairly often. But business is business."

Rose first heard of Green's interest in Arcadia when he was taking a short break at his second home in Suffolk. Green phoned Rose to say that a letter was in the post, stating that he was "minded" to make a 365p-a-share offer. It is understood that the news became public after one of Green's advisers leaked the story to the press. This irked Rose. "I wasn't happy about that," he says. "I don't like negotiating in public. I told him I wasn't happy, but he said that he didn't leak the story. You can read into that what you like."

But negotiate in public he must. After appointing investment bank Merrill Lynch and City PR firm Finsbury, and having secured the support of Bauger, an Icelandic retailer that owns 20 per cent of Arcadia's shares, Green isn't likely to back down easily. Sources close to him say that he could increase his offer early this week. But the fact that he's stalking Arcadia at all has raised eyebrows.

Green has made a name for himself by targeting asset-rich but undervalued and often poorly managed companies. Having transformed Bhs from a dwindling downmarket chain into a £1bn concern, he has had a pop at Marks & Spencer and Woolworths, and been linked to Littlewoods and Mothercare. "His usual tactic is to make the offer and then slag off the company and its management," says one analyst. "This time it's different."

Arcadia hardly falls into the basket-case category – not now, anyway. When Rose replaced John Hoerner as chief executive in November 2000, the company was on its knees. Saddled with debt and struggling with too much stock, the company's shares hit a low of 38p. Rose set about culling the weaker brands, such as Racing Green and Wade Smith, and he has all but wiped away the company's borrowings. With confidence restored, Arcadia's shares have staged an extraordinary rise. This, then, is hardly a classic Philip Green deal.

"Yes, he normally buys clapped-out companies that still have value," says Rose. "But I take [his offer] as a complement because he recognises that there is still value in Arcadia. Philip is quicker off the mark than most. There's plenty of growth potential in Arcadia. We're on a 5 per cent margin. We can do a lot more. We think we can make more progress by improving the inventory, making more process improvements, as well as more trading improvements."

He sites Wallis, which has 125 stores, as having potential for expansion. "There is an opportunity to add 40 to 50 more stores in the next few years." That's assuming that Green backs off.

Arcadia, without commenting publicly, has let the City know that if Green offered 425p-a-share then it would probably sell. This is all part of the bluster that comes with a company takeover, and in reality the price may be closer to 400p.

If Rose does sell, then he will receive a £23m options payment as part of the deal. Does this compromise his judgement? "Now let's knock this on the head: If I was to sell the company then I would rightly take my reward for what I have achieved. Without wanting to sound egotistical, I have taken Arcadia in 18 months from a company that was worth £70m to a company that is worth £700m."

But at the moment Rose is reluctant to contemplate selling. He's recently spoken to Arcadia's large shareholders about the offer. "I have to be careful how I put this because of the takeover rules, but the short answer is that they are supportive," he says. And speculation that he may one day land a top job within Green's empire is given short shrift: "I don't even want to talk about that," he says.

In reality, such a move would be unlikely. While both men have respect for each other, their style of doing business is very different. Green – direct, aggressive, sometimes intimidating – might not fit with Rose's smooth approach. At the top of his profession, with millions in the bank, the life of Riley may seem a more appealing proposition to Rose than reporting to Green.

Rose started his career at M&S, where he joined as a trainee. Some 17 years later he left for Burton Group but quit in 1997 when the company was divided into two – forming Debenhams and Arcadia. The incestuous nature of retailing is shown by the fact that Rose's friend and contemporary at Arcadia was Terry Green (the duo collect fine wine together) then worked for Philip Green (no relation) at Bhs, and is now set to take over at Mothercare.

Rose moved to Argos, where he was thrust on to the front line by defending the company from a hostile bid from GUS. While he lost, he was praised for pushing up the price. His next stop was Booker, the cash-and-carry chain, which he helped turn around, and later sold it to Iceland. His reward was £2m in options and a shiny reputation that caught the eye of Arcadia's head-hunters, who were searching for a chief executive.

Having Green stalking Arcadia isn't quite what Rose had in mind after transforming the business. Especially as his potential tormentor has a penchant for dressing up as Nero, a man who was an infamous persecutor and tyrant.