Homebase is open to offers at £1bn as Sainsbury receives approaches

J Sainsbury is considering selling its Homebase DIY business for £1bn in a move that could pave the way for a wider break-up of Britain's second largest supermarket group.

J Sainsbury is considering selling its Homebase DIY business for £1bn in a move that could pave the way for a wider break-up of Britain's second largest supermarket group.

City analysts said the disposal of Homebase could lead to a review of the group's Shaw's supermarkets operation in the US and make Sainsbury's more vulnerable to a bid. "Sainsbury's is a lot more digestible without Homebase," said Paul Smiddy, food retail analyst at Credit Lyonnais. "The cynical view is that they are tidying up the business to sell it," another said.

However, Sainsbury's maintained it was considering a range of options for Homebase and that an outright sale was far from certain. In a statement the company said: "Sainsbury's confirms it has had discussions with a number of parties and is in early stages of examining a number of strategic alternatives for Homebase including an alliance, disposal, or joint venture."

Sir Peter Davis, who joined the struggling company as chief executive in March, said: "People are rushing to the conclusion that the only solution is a sale. But it would take a good price for us to do that. I haven't come here to break this business up." Sir Peter said Homebase was a good business but needed more funds to expand in Europe. He said Sainsbury's was uncertain whether it had sufficient resources to fund this expansion as well as its main UK supermarkets business.

He said Sainsbury's had had a number of discussions with possible alliance partners. "In the process of doing that, venture capitalists and trade buyers said: 'Don't bother with that, just sell it to us'."

He said the discussions were at an early stage with Sainsbury's not expecting a final decision until "well into October". The news pushed Sainsbury's shares up nearly 5 per cent to 350p. Analysts said Homebase would be worth around £1bn with possible bidders likely to include Home Depot, the US giant, and LeRoy Merlin, the DIY division of the French Auchan group. Sir Peter said Homebase management had no interest in a buyout.

Homebase recorded profits of £64.6m last year on sales of £1.4bn. Its 297 stores have 12.3 per cent of the UK market. Sales have been growing strongly in the buoyant home improvement sector but the chain is well behind B&Q, the market leader with 23.8 per cent of the market.

The industry has also been consolidating across Europe with deals such as B&Q's merger with the French DIY retailer Castorama. This has left Homebase with relatively weak buying power, making it harder to compete on price.

Analysts said that if Homebase was sold it would be worth 50p per share with the proceeds likely to be returned to shareholders in the form of a special dividend. This would see the Sainsbury family, which controls 39 per cent of Sainsbury's shares, receive a windfall of £390m. Lord (David) Sainsbury, the former chairman, would be in line for £131m.

However, some analysts were sceptical on the wisdom of a sale. "I think it would be a mistake to sell it," said Mr Smiddy of Credit Lyonnais. "If they do, it would take Sainsbury's back to 20 years ago when it was just a supermarket business, which needed to expand out of a mature industry."