Hamleys' flagship store is on London's Regent Street

Hamleys said it had decided to recommend the 254p per share offer from Soldier - the bid vehicle formed by Baugur and a Hamleys management team - to its shareholders following Mr Waterstone's decision.

Mr Waterstone's Children's Stores Holdings had previously offered 230p for Hamleys before being trumped by Baugur.

In a statement Mr Waterstone said he was "disappointed" but that it was "not commercially viable" to offer more.

Children's Stores said it had now agreed to sell its 3.5 million shares in Hamleys to Baugur.

Share premium

Hamleys sells toys and games at its flagship store on London's Regent Street, and also has outlets at Heathrow and Schipol airport in the Netherlands.

"After a truly competitive process, we are now delighted to recommend the increased offer of 254 pence from Soldier Ltd," said Jim Hodkinson, chairman of the committee of independent directors of Hamleys.

"This offer represents over a 100% premium to the share price before the announcement of bid talks on March 17. Hamleys' shares last traded at this level in June 1998."

Baugur has been trying for some time to win full control of a UK retail business.

The company already has a 22% stake in Big Food Group - which owns the Iceland supermarket chain - and also owns shares in House of Fraser, Mothercare and JJB Sports.

Tim Waterstone gave his name to the High Street book chain which he founded but which is now owned by HMV.