Debenhams, the troubled department store group, is understood to have held talks with several European retailers, including KarstadtQuelle, of Germany, over a potential merger.

Sources said that Rob Templeman, Debenhams’ chief executive, was keen to exit the business and had held tentative discussions with the bosses of some of Europe’s biggest retail groups, including Galeries Lafayette in France.

Thomas Middlehoff, chief executive of Karstadquelle, has said that he plans to merge his department stores with a rival within 18 months as a precursor to a potential listing in London.

With a market capitalisation of €5.7 billion (£3.8 billion), Karstadquelle could easily acquire Debenhams. It is understood, however, that talks are tentative and several sources said that they were unlikely to result in a deal. “I would be very surprised if it’s true,” one banker said.

A spokesman for Debenhams declined to comment, saying only: “They talk to lots of people all of the time.”

Debenhams runs franchises across Europe and has said that its strategy for growth includes international expansion.

The group has long been the subject of takeover speculation, given its sagging share price since it was refloated in May 2006. Its shares closed at 130p on Friday, valuing the company at £1.1 billion.

Baugur, the Icelandic investor, is also seen as a potential bidder after amassing a 4.87 per cent stake in the company. Sources said that other private equity firms have also begun to circle, although no offers have been put on the table.

Debenhams has been cited as an example of what can go wrong when private equity firms take over a public business.

CVC Capital — which this year tried to buy J Sainsbury — Texas Pacific Group and Merrill Lynch Private Equity won the auction for Debenhams in 2004.

No sooner had it been taken private than the private equity trio embarked on aggressive cost-cutting, including a huge sale-and-leaseback of Debenhams properties, a clampdown on supplier costs and a slashing of capital spending.

The sale-and-leaseback, in March 2004, raised £430 million, of which £130 million was paid back to the three investors.

In May 2005, they did a recapitalisation of just over £1 billion, all of which went back to them.

The trio refloated the store chain in May last year, after just two years of ownership, but things have gone from bad to worse.

Debenhams shares have lost more than a third of their value and this year the group gave its third profit warning since December.

Critics say that while they were busy extracting value from the business, CVC, TPG and Merrill failed to invest in Debenhams.

That left it unable to compete with a resurgent Marks & Spencer, which seized market share.

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