Bears are an important part of Hamleys business

Baugur, which has also invested in the Iceland food chain, has been building up holdings in a number of top UK retailers.

The agreed bid for Hamleys is worth 205p a share.

It comes as the 200-year-old toy retailer unveiled a 35% increase in annual profits, to �5.6m.

'Excellent reputation'

The group's like-for-like sales, excluding new outlets, were up 9.4%, despite difficult trading conditions.

Baugur's chief executive Jon Asgeir Johannesson said: "The acquisition of Hamleys is an important step in Baugur's international strategy and we are looking forward to working with the Hamleys management team to continue the successful development of the business.

"We regard the acquisition of Hamleys, with its excellent brand and reputation, as a significant opportunity to strengthen our UK retail interests."

The Reykjavik-based retailer has built a 22% stake in Big Food Group, 8% in House of Fraser, 3% in Mothercare and 1% in JJB Sports.

Improved performance

It has never bought a business outright, but made �55m profit last year when selling its stake in Arcadia, the Burton and Top Shop retailer, to billionaire Philip Green.

Hamleys was floated on the London Stock Exchange in May 1994, but suffered declining profitability in the two years leading up to March 2000.

New senior management turned the firm round from 2000, Baugur said.

Jim Hodkinson, chairman of Hamleys' independent directors, which examined the bid on behalf of its management, said: "Through a three month competitive process, we have achieved an offer at a level which the independent directors are pleased to recommend."

In a separate statement, Hamleys reported improved performance at its 37 Bear Factory shops, which sells personalised cuddly toys.

Dividend dropped

It said sales had slowed at Hamleys landmark Regent Street store in London.

But it still expects to achieve continued profit growth despite challenging trading conditions, the firm added.

Hamleys is not paying a final dividend, giving a total payout of 2.2p a share, compared with 7.3p last year.

Chairman Simon Burke, said: "We have made our plans for the coming year in the expectation that it will be challenging and we have been aiming to deliver continued profit growth despite these challenges."

Ultimate control

The takeover bid by Soldier Ltd, a vehicle controlled by Baugur, represents a premium of 5.7% on Monday's closing price.

If the deal goes through, Baugur will take ultimate control of Soldier, with the Hamleys managers owning a minority interest.

Besides its Regent Street store, Hamleys has outlets at Heathrow Airport, Covent Garden in central London and Schiphol Airport in Amsterdam.