Coffee bar chain Coffee Republic has admitted that it has received a takeover approach.

However, the group would not confirm or deny that the approach has come from rival chain Caffe Nero, which on Tuesday revealed it had bought a 4.3% stake in the company.

Coffee Republic divulged the takeover interest after a 38% rise in its share price on Tuesday and growing speculation following news of the Caffe Nero purchase.

However, Caffe Nero said only that it had bought the shares "because the price is down".

Battle of the brews

Coffee Republic has seen its value dwindle in the past 18 months, as sales struggled and both its founder Bobby Hashemi and new finance director William Scott resigned.

The group confessed in January that it would not reach profit expectations on target, and six months later said it was halting expansion and closing 18 shops.

Caffe Nero, meanwhile, has continued its rapid growth, becoming the largest UK-listed coffee chain and raising �5m for further expansion.

Shrewd investment

While analysts have speculated that Caffe Nero could make a bid for its rival, there is also the possibility its founder Gerry Ford is living up to his reputation as a shrewd businessman.

A Caffe Nero spokesperson said on Tuesday that his 4.3% stake was "a strategic holding in a distressed competitor".

The stake has already risen in value.

Then price of Coffee Republic shares jumped a further 11% on Wednesday to hit a high of 5.75p, before easing to close at 4.75p, up 0.25p on the day.

The stock hit 30p at the start of 2001.

Caffe Nero shares, which topped 50p in January 2001, closed 0.5p higher at 26p.