HMV, the owner of Waterstone's, today confirmed talks that could lead to its takeover of the struggling Ottakar's book chain.

The statement from HMV, a retailer of books and music, sent shares of Ottakar's soaring 5% to 357p, valuing the company at about £70m.

"HMV group confirms that it is in preliminary discussions with the committee of Ottakar's independent directors which may or may not lead to an offer being made for the company," HMV said in a statement.

The offer under discussion would be through a new company to be formed by private equity investors and some of Ottakar's directors, HMV said.

Ottakar's emerged as a takeover target less than a fortnight ago when the company's founders announced plans to take the company private seven years after its stock market flotation.

Three directors are involved in the possible management buyout, including the managing director, James Heneage, who founded the business in 1987 with the chairman, Philip Dunne, who is also the Tory MP for Ludlow.

When the management buyout was announced, there was speculation that the move was intended to flush out a buyer such as HMV.

According to industry estimates Waterstone's has between 14.5% and 18% of the book market, while Ottakar's owns 136 stores in the UK and controls as much as 8%.

A merger should get the nod from competition authorities as they do not compete in the same markets. Ottakar's grew by opening stores in market towns that were largely ignored by the big chains, including Waterstone's.

Ottakar's reported a 2004 pre-tax profit of £7.1m on turnover of £153.7m. Its share price took a beating after a January profit warning following a disappointing Christmas.

Even the publication in early July of the new Harry Potter novel - and the ploy of temporarily of renaming itself "Pottakar's" - failed to lift sales.

Ottakar's said same-store sales fell 6.7% in the four weeks to July 16 as it felt the pressure from supermarkets such as Tesco and Asda which have muscled into book and music sales. Online retailers such as Amazon have also had a negative impact.