Under the deal being proposed, Wesfarmers would buy the entire Homebase business, including all stores and distribution centres. Product brands such as Habitat would not be included, but licensed for use by Homebase for one year.
Shares in Home Retail, which updates the market on its Christmas trading on Thursday, closed up 4.1% at 147.7p before the Homebase announcement.
The stock has jumped by more than 50% since Home Retail's rejection of the Sainsbury's bid was revealed.