A newspaper report suggesting that Marks & Spencer has been in talks with Three Delta and Delta Two funds to launch a bid for the UK's third-largest supermarket chain Sainsbury have been dismissed as a 'red herring'.

Shares of Sainsbury rose as much as 11 pence to 515 pence in London in early trading on Monday after the Sunday Telegraph linked M&S and the Qatar-backed fund to a possible takeover. Delta Two owns a 1% stake in Sainsbury.

Sainsbury's share price has risen a total of 26% this year after private equity groups Blackstone, Kohlberg Kravis Roberts and CVC Capital Partners indicated in early February that they may bid for Sainsbury. The Financial Times reported at that time that the three had hired property adviser DTZ to examine Sainsbury's 769 stores. A takeover by clothes retailer M&S would create a company with 11,000 stores. But the real jewel in Sainsbury's crown is its freehold property with an estimated value of £7.5 bn, not far removed from the company's market capitalisation of £8.8 bn.

This has given rise to speculation that KKR was planning a repeat of the strategy it used in the Netherlands in 2004 when it paid EUR 1.6 bn for Dutch retailer Vendex before selling its properties in a sale and leaseback deal for EUR 1.5bn.

However, officials of both M&S and Sainsbury declined to comment publicly on the latest Sunday Telegraph's story. Later unnamed sources close to M&S dismissed the report as a 'red herring'.