Shares in Sainsbury's jumped 17% to 316p in morning trading.
Walmart will hold 42% in the combined business and will receive £2.975bn in cash, valuing Asda at £7.3bn on a debt-free, cash-free and pension-free basis.
Sainsbury’s expects the deal to generate £500mln in synergies by opening Argos in Asda stores and through operational efficiencies.
Sainsbury's soothes concerns about jobs and pensions
It said there were no plans to close Sainsbury’s or Asda stores after unions warned the deal would result in store closures and job losses.
Sainsbury’s also insisted that the pension schemes of the two businesses would be protected with Walmart maintaining Asda’s defined benefit scheme.
The deal is expected to be completed in the second half of 2019 but still needs approval from shareholders and the UK Competition and Markets Authority.
The CMA said in a statement on Monday that the deal would be subject to a review to assess whether it could "reduce competition and choice for shoppers".
Enlarged group to cut prices
Sainsbury’s believes the merger will result in a “more competitive and resilient business” that will be able to better invest in price, quality, range and technology to create more value for customers.
The group said it expects to lower prices by 10% on "many of the products customers buy regularly".
"It will create a business that is more dynamic, more adaptable, more resilient and an even bigger contributor to the UK economy," said Mike Coupe, the chief executive of Sainsbury’s.
"Having worked at Asda before Sainsbury's, I understand the culture and the businesses well and believe they are the best possible fit."
Coupe will lead the enlarged group along with Sainsbury’s chairman, David Tyler.
Walmart will be subject to a lock up for its full 42% shareholding for the first two years following completion of the deal. It will then be able to sell down its stake to a minimum of 29.9%. The lock up expires in four years after completion, allowing Walmart to dispose of its holding completely.
The Qatar Investment Authority, which has tried to buy Sainsbury’s in the past, is currently the UK supermarket group’s biggest shareholder with a 22% stake.
Intense supermarket rivalry
The deal comes at a time when the UK’s largest supermarkets are losing market share to discounters Aldi and Lidl and are facing rising online competition from the likes of Amazon Inc (NASDAQ:AMZN), which took over Whole Foods last year.
"With this merger, the combined entity would not only be in a better position to fight the German discounters such as Aldi and Lidl but also Amazon’s recent move in the grocery space," said Naeem Aslam, chief market analyst at Think Markets UK.
"The entity’s combined value of £5.9bn also threatens the UK's largest market shareholder firm in this space called Tesco."
HSBC raised its rating on the stock to 'hold' from' reduce' and lifted its target price to 270p from 201p, saying it thinks the merger "makes economic sense in a scale-driven industry and we think Argos into Asda stores makes sense".
Sainsbury's full year profits fall
Separately, Sainsbury’s on Monday published its results for the year to 10 March 2018.
The company reported a 1.4% increase in underlying pre-tax profit to £589mln and a 9% rise in group sales to £31.8bn. Including a £180mln charge for the integration of Argos and Sainsbury’s Bank transition costs, pre-tax profit fell to £409mln from £503mln last year.