HMV, the books and music retailer, today offered £96.4m for bookseller Ottakar's, topping a rival bid.

The owner of Waterstone's said its 440p-a-share offer was 10% higher than an agreed management buyout and urged independent directors to switch sides. The directors this week had recommended an increased bid from management - backed by private equity - at 400p a share or £91.1m.

"The store portfolios of Ottakar's and Waterstone's are highly complementary and the combined group will be better positioned to provide customers with a wider and more relevant choice of titles and an attractive programme of promotional offers," the HMV chief executive, Alan Giles, said in a statement.

HMV's entry into the fray threatens to scupper the management buyout led by James Heneage and Conservative MP Philip Dunne, who founded the firm together in 1987.

Their hopes of taking the company private received a potentially fatal blow when they lost the support of investors Morley Fund Management and Framlington Investment Management, which own 30% of shares and are now backing the HMV bid.

HMV has sent a submission to the Office of Fair Trading supporting its view that a takeover would not give rise to any material competition issues.

The firm cited data from market research firm TNS which suggested that a combined group would have 23.6% of the book market - below the crucial 25% threshold.

A merger should get the nod from competition authorities as the two 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.

Mr Heneage said he wanted to take the business private because of the need to make an investment in computer systems that would take up to three years.

Ottakar's was floated in 1998 at 153p a share. After an upward ride it has endured a more difficult 2005 after a profit warning in January, a fall in sales in March and poor sales of Harry Potter in July. The firm reported a 2004 pre-tax profit of £7.1m on turnover of £153.7m.

Shares in Ottakar's were up 7.1% today at 436.50p.