Delta Two, the Qatari-backed investment fund stalking J Sainsbury, could beef up its £10.6 billion approach to the supermarket chain as early as this week.

The fund is considering improving the cash element of its proposal by £500 million, after talks with the Sainsbury’s board last week. The board has been concerned that loading the company up with debt would harm its ability to compete with rivals.

Talks between the two groups have remained amicable, with sources playing down speculation that Sainsbury’s had demanded that Delta Two make its best and final offer or walk away. A source said: “There’s progress being made and I don’t think they’re in that kind of position yet. The mood is still friendly.”

Negotiations are expected to continue this week, with sources saying that there were a number of details to be hammered out.

Delta Two approached Sainsbury’s with a 600p-a-share proposed offer in July. The Sainsbury family, which owns 18 per cent of the company, is worried about the £6 billion debt component of the bid. Only £3.1 billion of the bid is pure equity, with another £1.5 billion made up of payment-in-kind, a type of long-term finance in which interest, instead of being paid up front, is added to the original loan amount, increasing the level of cash interest paid to lenders. The board is thought to be prepared to recommend an offer without the backing of the family. However, with a requirement to obtain 75 per cent approval from shareholders for the deal to go through, the fund would prefer to have the family onside.

In July Delta Two supplied Sainsbury’s with letters from ABN Amro, Credit Suisse and Dresdner Kleinwort, saying that the debt element of the offer had been organised. Since then it has confirmed that the financing is still in place, despite a recent tightening in the credit market that has made it more difficult and costly for banks to syndicate loans. European banks are thought to be sitting on about €80 billion (£54 billion) in unsyndicated loans and the Sainsbury’s acquisition is being watched carefully in order to assess whether the market’s appetite for risk has returned.

Last month Cadbury Schweppes dropped plans to sell its drinks business in the United States after concluding that private equity would not be able to raise funds for the purchase, given the freeze on financing. The $23 billion sale of Virgin Media has also been derailed. The television and telecoms group said that its auction had been put on hold until a “more stable debt market environment” emerged.

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