The two department store chains House of Fraser and Allders could be set to merge, according to reports.

Both companies have been approached separately regarding a takeover, but only Allders has so far agreed.

That has not dampened speculation that discussions are already underway between key retail entrepreneurs Terry Green and Tom Hunter over joining the two groups.

Allders recommended last week that shareholders accept an offer from the investment group Scarlett Retail, which would mean the company being headed by Terry Green.

Press reports now suggest Mr Green is in discussions with Mr Hunter, the Scottish businessman who has approached House of Fraser regarding a takeover.

Retail soap

House of Fraser rejected the bid

According to the Reuters news agency, Mr Hunter and Mr Green are considering joining forces in a deal which would give them a substantial chunk of the department store market.

In another twist to what reads increasingly like a retailing soap opera, Mr Hunter is building a stake in Allders and now owns 3.5% of the department store group.

Reuters said "preliminary chats" had taken place between the two entrepreneurs, both of whom have a strong reputation in the world of retailing.

The report suggested Mr Hunter had approached Mr Green about merging the two companies but that neither was available for comment.

Industry pressure

Competition among department store groups has prompted speculation that pooling efforts is the way forward for smaller players.

Mr Green, the former chief executive of BHS but no relation to the more flamboyant retail entrepreneur Philip Green, is bidding for Allders along with the property company Minerva and Lehman Brothers investment bank.

Allders said intense pressure on the High Street and on the stock market had led it to accept the offer.

House of Fraser, meanwhile, criticised Mr Hunter for making his approach earlier in December, during the crucial Christmas trading period.

However, there are now suggestions that Mr Hunter will return with a higher offer in the new year.