(Bloomberg)—J Sainsbury Plc is considering making an offer for Home Retail Group Plc in a deal that would combine two of the U.K.’s largest retailers and add everything from sofas to suitcases to Sainsbury’s lineup.

Home Retail, the owner of Argos stores and the Homebase home-improvement chain, rejected a cash-and-share approach in November, London-based Sainsbury said in a statement Tuesday. Home Retail is No. 6 in the Internet Retailer 2015 Europe 500; Sainsbury’s is No. 16. The supermarket company said it is now “considering its position,” and has until Feb. 2 to decide whether to make a formal offer under U.K. takeover rules.

Shares in Home Retail Group rose as much as 34% to 132.7 pence in London, giving the company a market value of about 1.1 billion pounds ($1.6 billion). Sainsbury fell 4.9% to 242.9 pence, after gaining as much as 8.1%.

Sainsbury is no stranger to Home Retail, having started opening Argos outlets inside about 10 of its supermarkets last year. The grocer’s chairman, David Tyler, knows Homebase from his time as finance director of GUS Plc, which acquired the chain in 2002 and spun it off with Argos in 2006, creating Home Retail Group.

Greater scale

“The approach is a bit of a surprise,” said Bryan Roberts, an analyst at TCC Global in London. “The relationship between Sainsburys and Home Retail has deepened over the last 18 months with the addition of Argos concessions in Sainsbury stores.”

“It would be something of a stretch for Sainsburys to convince investors that it’s a really good idea,” said Charles Allen, an analyst at Bloomberg Intelligence. “Sainsbury’s margins are at risk and it is trying to buy another business where margins are also falling.”

Sainsbury could justify paying as much as 1.3 billion pounds, according to Simon Bowler, an analyst at Exane BNP Paribas. He estimates that the combination could produce cost benefits of 100 million pounds to 150 million pounds.

Bringing the companies together will enable them to optimize use of their retail space, while enhancing their supply and delivery networks, Sainsbury said in the statement. Sainsbury has said that about a quarter of its stores have some underutilized space, which it intends to fill with clothing, other nonfood items and in-store concessions. The grocer said sales would benefit from selling to each others’ customers, while a deal would yield cost savings from property rationalization and greater scale.

An acquisition by Sainsbury would bring Homebase back into the arms of its original parent, which jointly founded the company in 1979.

Sainsbury has already identified expansion into non-food areas as a means of combating a declining grocery market where discounters are taking an ever-growing slice of spending. In the first half of the current financial year, the supermarket company’s clothing sales rose by almost 10%.

Sainsbury’s statement made no mention of Homebase, the do-it-yourself chain which it jointly founded in 1979 and later sold. That may indicate that the grocer has a buyer lined up for the business, according to James Collins, an analyst at Stifel. He places a value of 317 million pounds on Homebase, which accounts for more than a quarter of Home Retail Group’s revenue.

Past speculation

Home Retail has been subject to takeover speculation for some time. The Sunday Times reported in November that private-equity companies were considering an offer. The same publication said last month that Leroy Merlin may make a bid for Homebase.

At Argos stores, shoppers pick products from a catalog and have it brought out from a back room or delivered to their home. The chain’s sales have declined as supermarkets including Tesco Plc, No. 3 in the Europe 500, and web retailers such as Amazon.com Inc., No. 1 in the Internet Retailer 2015 Top 500 Guide and Europe 500, have expanded into areas including toys and consumer electronics.

Morgan Stanley & Co. and UBS are advising Sainsbury.

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