(Adds Wesfarmers statement)
By Paul Sandle
LONDON, Jan 13 (Reuters) - British takeover target Home Retail HOME.L said on Wednesday it was in advanced talks to sell its Homebase home improvement stores to Australia's Wesfarmers WES.AX for 340 million pounds ($490 million) in cash, allowing it to focus on its Argos chain.
If successful, the move by conglomerate Wesfarmers, Australia's dominant hardware retailer and second biggest supermarket owner, would mark its first acquisition offshore.
"The UK home improvement and garden market is an attractive and growing market," Wesfarmers said in a statement confirming that it had made a conditional offer for the UK's second largest home improvement and garden retailer.
Supermarkets operator Sainsbury's SBRY.L made an approach to buy the whole of Home Retail in November - a couple of months after Wesfarmers started talks - but its interest lies in Home Retail's bigger Argos general merchandise business, according to the rationale it published earlier on Wednesday. Retail, responding to a Sky News report, said it was finalising the Homebase sale. Home Retail and Wesfarmers said there was no guarantee it would conclude.
Wesfarmers said its aim was to "reinvigorate" Homebase's assets and build a Bunnings-branded business over three to five years. Bunnings is Australia's leading home improvement chain.
Home Retail considered selling Homebase in 2014, but decided instead to shrink the number of stores by a quarter while it focused on Argos, which contributed about six times as much operating profit as Homebase in its 2015 financial year. Retail Chief Executive John Walden said a sale represented good value for shareholders as it would come about a year into a three-year improvement plan for the chain, which trails Kingfisher's KGF.L B&Q and Travis Perkins' TPK.L Wickes in the British DIY market.
"The sale would allow the group to focus on Argos and its transformation plan, with an improved balance sheet and financial position, which I believe represents an even greater opportunity for building long-term shareholder value," he said.
Sainsbury's jointly founded Homebase and owned the chain until 2000, but it barely mentioned the stores when it laid out the "compelling" logic behind its ambitions for Home Retail, leading to speculation that it would immediately offload the business to private equity or another retailer.
A sale to Wesfarmers relieves Sainsbury's of that task. It has until Feb. 2 to make a firm offer or walk away.
Analysts at Investec had put a value of 1.45 billion pounds on Home Retail, based on their assumptions of an equity value of 230 million pounds for Homebase, 360 million for Argos and the remainder from cash, its loan book and freehold property.
Home Retail said about 200 million pounds of the proceeds from Homebase would be returned to shareholders, while 75 million would go on restructuring and deal costs and 50 million would be paid into its pension scheme.
It said selling the business, which contributed 19.8 million pounds in operating profit in its 2015 financial year, would significantly improve its balance sheet, mainly by reducing its store leasing liabilities.
Wesfarmers, which is being advised by Lazard, declined to comment on how it would fund the cash deal.
Home Retail said it would update the market on its Christmas trading on Thursday.
($1 = 0.6925 pounds)