Sainsbury's, Britain's second biggest supermarket which is 25 percent owned by Qatar Investment Authority, has agreed to buy Argos-owner Home Retail for £1.3 billion ($1.86 billion) to boost its online business and expand sales of items such as electrical goods.
The acquisition is a response to intense competition between British supermarket groups and will make Sainsbury's less reliant on food sales.
Argos is a general retailer which built its business around a catalogue from which shoppers could choose goods in stores and has now one of the most advanced online sales and delivery networks in the country.
Home Retail, which said in January it had rejected an earlier undisclosed offer from Sainsbury's, said it was willing to recommend a bid of about 161.3 pence per Home Retail share.
Shares in Home Retail had been trading at about 100 pence prior to news of Sainsbury's initial approach.
Britain's retail sector has been hammered in recent years by the growth of discount groups including Germany's Aldi and Lidl and online competition.
While Sainsbury's has fared better than most, it believes it needs to improve its online sales and enhance its delivery capabilities in order to grow.
Sainsbury's says a deal could speed up deliveries of non-food products and widen its range of electronics, appliances and toys. It would also allow it to make better use of space by shutting some Argos stores, selling Sainsbury's products in others and opening Argos concessions in its supermarkets.
But many analysts and investors have been sceptical, pointing to poor trading at Argos and fearing that Sainsbury's management could be distracted by the integration at a time when the supermarket sector is under huge pressure.
Sainsbury's said it expected the offer to boost its earnings per share in the first full year following completion. In the third full year it should increase earnings by more than 10 percent.
It sees annual savings and benefits of at least £120 million in the third year.
The deal had been made easier by Home Retail's move last month to sell its Homebase do-it-yourself chain to Australia's Wesfarmers for 340 million pounds, leaving it with just the Argos business that Sainsbury's covets.
Under the terms of the offer Home Retail shareholders will receive 0.321 new Sainsbury's shares and 55 pence in cash for each of their shares.
In addition they will receive, prior to completion of the deal, a capital return of about 25 pence per share and payment of 2.8 pence in lieu of a final dividend.
Earlier this month Home Retail reported poor sales over Christmas for Argos.