Benjys, the London-based sandwich chain with ambitions to become a national player, has ended its pursuit of a merger with Coffee Republic, the struggling coffee shop chain, after the two sides failed to agree on terms or valuations.

Observers say Benjys wanted a reverse takeover which would have seen Coffee Republic's shareholders own only about 30% of the combined company, while Coffee Republic was looking at a figure closer to 40%.

Coffee Republic, which has 104 outlets, received a boost when Barclays agreed earlier this month to continue financing the company, while Benjys, its appetite for a deal waning, decided, after doing due diligence, to offer less than the price it had initially discussed.

Coffee Republic was also supported in its decision to hang out for a better price by two of its biggest shareholders. Julian Richer, the millionaire owner of the audio equipment retailer Richer Sounds, who has an 18% stake in the chain, allegedly did not want to rush into a hurried sale of the business, while Caffe Nero Group, which owns a 10.7% stake in Coffee Republic, was also unhappy about the merger terms.

A disappointed Benjys said in a statement: "The Coffee Republic deal certainly made sense and our strategy of injecting our profitable business into their portfolio of sites would have neatly addressed the issues that their business faced." The all-share deal valued Coffee Republic at £10m, while its current market capitalisation is just £6m.

In September, EasyGroup decided not to make its own cash bid for Coffee Republic, to expand its Easyinternetcafe chain. However, it is said to be still interested in installing computers with internet access in a number of Coffee Republic outlets.

Coffee Republic, which applied yesterday to move from the main London stock market to Aim to cut costs, is thought to be still looking for a potential merger or joint-venture partner.

Benjys said it still wants to expand nationally, and is looking at "a number of different sites".