HMV today moved closer to taking over rival Ottakar's after the Competition Commission concluded that a merger of the two book chains would not lessen competition.

Shares in Ottakar's were up 4.3% in lunchtime trading at 333p, as investors anticipated HMV, the owner of Waterstone's, stepping in with a fresh bid.

HMV launched a 440p-a-share bid for Ottakar's in September valuing the bookseller, formed in 1987 by James Heneage and Philip Dunne, at around £97m. The offer lapsed when it was referred to the competition authorities.

"We are pleased with the decision and will update the market," HMV said.

In a trading statement on Tuesday, HMV said it had yet to decide whether or not to make a new offer.

"Once this situation has been clarified, as part of its commitment to creating shareholder value the board will progress its review of the group's capital structure and potential to operate the group with a higher level of financial leverage," HMV said.

If HMV decides to go ahead with a fresh bid, analysts expect a lower price than its original offer because trading at Ottakar's has deteriorated since then. Analysts expect a bid of around 360p, but HMV will not want to bid too low in case others, such as WH Smith and even Tim Waterstone, the founder of Waterstone's, jump in.

In its final report on the proposed merger, the Competition Commission concluded that the "proposed merger would not result in a substantial lessening of competition" in the short term. In the long term, it said it did not consider that store closures would decrease competition either.

HMV, which has 190 Waterstone's stores, justified the proposed merger on the grounds that it would be better able to compete with Borders, WH Smith, supermarkets and internet retailers. Ottakar's has 141 stores in market towns where big retailers are less likely to be present.

Analysts have voiced doubts about the long-term prospects of the merger as HMV would still face structural issues such as price pressure, a slowdown in core markets such as DVDs because of music downloads.

The Competition Commission found that Waterstone's and Ottakar's were coming under pressure, not so much from supermarkets, which have begun moving into books and CDs, as from WH Smith, Borders and internet retailers.

HMV itself has been a bid target. It has twice rejected bids from the private equity group Permira. HMV said the revised offer of £847m in March still undervalued the company.

Both Waterstone's and Ottakar's reported tough trading conditions last year. Waterstone's reported a 2.5% drop in like-for-like sales at Christmas despite deep discounting; its sales decline has continued this year. Ottakar's saw a 3% drop in sales for the year ending January 2006.

Competition Commission: final report (pdf).