Sainsbury’s is preparing a formal bid of £1.2bn for Home Retail and is already lining up a buyer for Homebase, according to reports.

A bid could come as early as this week, the Mail on Sunday reported.

However, fund managers with stakes in Home Retail believe a realistic bid could have to be up to 180p a share, valuing the group at £1.4bn.

The grocery chain revealed last week that it made a bid approach for the Argos owner in November, but it was rejected.

Sources told the newspaper there were signs that Sainsbury’s advisers had already tried to line up a possible buyer for Homebase

One investment banking source reportedly said: “They have not yet answered the fundamental question about how they are going to get rid of Homebase – which I think could be more difficult than they anticipate. Until they do that there is going to be a drag on this process.”

Sainsbury’s, which reports Christmas trading figures on Wednesday, has until February 2 to make a formal offer.