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Supermarket group J Sainsbury (LON:SBRY) has made a takeover approach for Home Retail (LON:HOME), but analysts say there may be more twists in the tale.
Sainsbury said the approach involved a potential cash-and-share offer for the Argos and Homebase retailer, which has faced tough online competition.
The supermarket group said: "The approach was rejected by Home Retail Group and Sainsbury's is considering its position. There can be no certainty that this will result in a formal offer, nor as to the terms of any such offer."
Any takeover by Sainsbury's would have echoes of the past, as the supermarket retailer used to own DIY chain Homebase.
In November, speculation swirled that a number of private equity firms were eyeing Home Retail for a possible £1bn takeover bid.
Ketan Patel, associate fund manager at EdenTree Investment Management, said the deal could go ahead but there was the prospect of rival interest.
He also said it was unlikely to be cheap for Sainsbury's, which may have to pay up to £1.3bn, and it could make its business more complex.
"Surely they should be concentrating on running a supermarket, so when you start adding things on, it's going to get more difficult," he said.
"There are a lot more questions that investors are going to ask."
Sainsbury's said in a statement that it had been working in partnership with Home Retail to trial several concessions in Sainsbury stores.
The supermarket chain said: "The board of Sainsbury's believes the combination of Sainsbury's and Home Retail Group is an attractive proposition for the customers and shareholders of both companies."
It said it believed a tie-up would create a food and non-food retailer able to increase profitable sales by offering a wide range of products.
Sainsbury also said a deal would allow the pair to combine their resources,giving them attractively located stores across the UK.
It would also offer an enhanced supply and delivery network and a strong presence across food and grocery, clothing, homewares, toys, stationery, electricals, furniture and other general merchandise.
Shares in Home Retail, which had climbed 13% before news of the approach, soared more than 39% to 137.2p. Sainsbury shares dropped 5.2% to 242.1p.
They topped the market risers on a day when the outlook for retail took a hit from a profit warning from fashion retailer Next (LON:NXT).