--- Updates with more detail, comment and share prices ---
Sainsbury's (LON:SBRY) has thrashed out a deal to buy Argos owner Home Retail (LON:HOME) for about £1.3bn, lifting its shares by more than 2%.
The supermarket chain and Home Retail said they had reached an agreement whereby the latter's shareholders would receive 0.321 new Sainsbury shares plus 55p in cash for each Home Retail share.
Sainsbury's has been racing to get the deal done ahead of a Takeover Panel "put-up-or-shut-up" deadline today.
The chain has been careful to assure investors such as the Qatar Investment Authority that it was not going to overpay for Home Retail.
But investors in the latter, such as Schroders, cautioned that they wanted in the region of 165p per share, which would have valued the group at about £1.34bn.
Shares in Home Retail were 0.5p up at 153.4p while Sainsbury's stock lifted 6.4p to 251p.
City opinion on the deal has been mixed, with some analysts warning that absorbing Argos could be a challenge for a supermarket chain like Sainsbury's, given online competition and its total focus on non-food.
Jonathan Buxton, partner at Cavendish Corporate Finance, said: "There should be sufficient cash in the Sainsbury's offer to persuade Home Retail shareholders of jam today, while the jam tomorrow comes from shares in a new Sainsbury with a larger non-food offering than M&S (LON:MKS).
"With the albatross of Homebase already sold off, Sainsbury can focus on cherry-picking Home Retail for the best high street Argos stores to keep or to convert to its successful Sainsbury's local network.
"Any big supermarket trying to stay the same will struggle to stem the sales decline from the advent of discounters and the prospect of Amazon accelerating into both food and non-food.
"There will remain, however, a real challenge in successfully integrating a sprawling non-food retailer imperilled by competition within its own sector."
Warwick Business School merger expert John Colley said: "Home Retail is a troubled business with Homebase making little money and Argos's business model under pressure from Amazon and eBay.
"Sainsbury's management are not just moving into new channels, but they would be taking on troubled businesses to sort out as well. Quite a major gamble."
Home Retail said it was ready to recommend the deal to its shareholders, saying: "Whilst the board of HRG continues to believe in the prospects for the standalone company, it recognises the possible offer will provide an attractive opportunity for HRG shareholders to receive a full valuation for their shares."
Sainsbury's said the deal would create a retailer with digital, store and delivery networks able to provide a wide range of food and non-food products.
It said the possible offer should improve its earnings per share in the first full year following completion.
In the third full year following completion, Sainsbury's also expects it to result in double-digit earnings per share accretion and a low to mid-teens return on invested capital.
Savings attributable to underlying earnings are expected to amount to at least £120mln in the third full year after completion, from new and relocated Argos concessions in Sainsbury's shops.
Costs of the saving drive are expected to amount to about £140mln.
Investors in the Argos owner would also get payments per Home Retail share of about 25p - the Homebase capital return (HCR) - plus 2.8p per share instead of a final dividend for the year to February 27.
The HCR reflects the £200mln return in respect of and subject to the £340mln sale of Homebase to Australian group Wesfarmers, announced by Home Retail on January 18.