Matalan, founded by former Liverpool market trader John Hargreaves, has refused to comment on the rumours, which come not long after the group revealed plans to cut costs by £15m.
Icelandic investor Bauger has been mooted as another possible buyer, however chief executive Jon Asgeir Johannesson and other executives are facing a possible investigation over charges of fraud made by the Icelandic financial authority.
Johanesson said he would not be doing any major deals until he was cleared of the charges.
Bauger recently withdrew its bid to takeover Somerfield in response to the police investigations against Johannesson.
Since 1998, Bauger has acquired food retailer Iceland, cash and carry operator Booker, the Goldsmiths jewellery chain and Hamley's, the London toy store.
Matalan shares rose 11.5% to 213p following the speculation yesterday, putting the group at a 12-week high with the business valued at £893m.
This comes even though total sales were 1.5% lower, and like-for-like sales down by 6.5%, in the nine weeks to July 2. By the market's close it had fallen slightly to 202p, still more than 10%% up on the day.
Matalan has been the subject of repeated bid speculation during the past few months, although some say this is due to shareholders trying to inflate the price of the stock.
Recently, Matalan announced it planned to make £15m in annual cost savings with the loss of several hundred jobs at its head office and stores. It is expected that the numbers affected will be released in a statement by the end of the month.
If you have an opinion on this or any other issue raised on Brand Republic, join the debate in the .