The  Arnotts board has a fiduciary duty to engage in dialogue with Carrgran, the firm that has offered €11.80 per share for the retailer, BCP Stockbrokers has said.

It believes the offer fully values Arnotts as a going concern and failure to enter talks could lead to the offer's withdrawal and the share price slipping back below €10.

"The board would best serve the interests of shareholders if it would engage in dialogue with Carrgran with a view to extracting a formal bid which could then be put to shareholders so that they can decide for themselves on the merits of the offer," BCP analyst Mr Neil Osborne said.

Carrgran, controlled by Lehman Brothers, corporate financier Mr Peter O'Grady-Walshe and former Arnotts trading manager Mr Mark Delaney, has been given until Friday by the Irish Takeover Panel to announce a firm intention to make an offer or to walk away. The deadline can only be extended at Arnotts' request.

It is understood that Carrgran remains in the frame, and is considering a further indicative offer. But it will not be in a position to make a firm offer by Friday as it has yet to carry out due diligence on Arnotts. It is also believed it will only make a firm offer once it has received the board's recommendation. As a result, it is dependent on the Arnotts' board requesting an extension of the deadline if it is to have any hope of success.

To date, the Arnotts' board, led by chairman Mr Michael O'Connor, has rejected two offers by Carrgran, the first at €11.50 and more recently at €11.80, saying they failed adequately to value the firm and its prospects. Other analysts say the firm is worth at least €13.

But BCP said that following a study of the operating performance of Arnotts relative to its peer group in Britain, it believes the business has not been managed as effectively as its UK counterparts in terms of return on invested capital, operating margin and capital turnover.

"The extent of this under-performance is even more pronounced when allowance is made for the fact that the firm has had the benefit of a contribution holiday to its pension fund," it said.

It also considered the recent acquisition of Harvey Nichols and House of Fraser in Britain and argues that on the basis of price to cashflow and price to net asset value, the €11.80 offer for Arnotts is at the top of the valuation range.

"It seems to us that the rationale for acquiring Arnotts is that it is an underperforming asset," BCP's Mr Osborne said. "Unless the board can articulate how the company will improve its performance under the present management, we believe it should enter into discussions with Carrgran with a view to negotiating the best possible price for the shareholders of Arnotts."

Meanwhile, it emerged yesterday that US fund manager Fidelity had cut its Arnotts stake to 9.9 per cent from 10.1 per cent after selling 34,000 shares.