Caffe Nero builds up war chest

But the firm declined to comment on speculation that it is preparing a bid for rival Coffee Republic.

Nero, the largest UK-owned chain, said on Friday that it now had £10m to spend on its rapid expansion and that it planned to keep opening about three or four shops a month.

News of the extra cash followed rumours that Nero was behind a takeover approach for Coffee Republic, after building a 10.69% stake in its rival.

But Nero's chief executive Gerry Ford declined to comment on the speculation.

"I'm not going to get into whether we're going to buy Coffee Republic," Mr Ford said.

Nero said its business was trading well, and that the 26 Aroma coffee shops bought from McDonald's in April had already grown sales by 20%.

Funds for growth

Caffe Nero raised its latest funds from Bank of Scotland Corporate Banking.

The coffee chain said this money, in addition to £3m cash already held, should be enough to fund its expansion for the next 12 months.

The group raised £5m in February and spent £2.15m buying Aroma.

News of the latest cash boost fuelled rumours that it will bid for Coffee Republic, after increasing its holding throughout the week from 4.3% to 10.69%.

On Wednesday, Coffee Republic admitted it had received a takeover approach but neither company would comment further.

Mark Hughes, analyst at Numis Securities, said: "It puts them (Nero) in a position to do something if they want to do it.

"This also shows confidence from its bank in the company's performance."

Winning formula

Caffe Nero's trading update contrasts sharply with that of its rival last month.

While Nero said it continued "to see stable growth in London and encouraging levels of growth in the regions", Republic was forced to halt its expansion and sell 18 sites because of tough competition.

Caffe Nero added today that it had been voted the UK's number one coffee brand for the third year in a row in an official report by Allegra Strategies.

In the City, Caffe Nero shares closed 1p higher at 27p.

Coffee Republic stock ended 0.5p up at 4.75p.