British supermarket chain Sainsbury's to buy Argos-owner Home Retail for £1.3 bn

Sainsbury's, the UK's second-largest supermarket chain, today offered to buy Argos-owner Home Retail for £1.3 billion ($1.9 billion).

The deal does not include Home Retail's Homebase do-it-yourself chain, which it had agreed last month to sell to Australia's Wesfarmers for £340 million.

Under the terms of the transaction, Home Retail shareholders will receive 0.321 new Sainsbury's shares and 55 pence in cash for each of their shares.

In addition Home Retail shareholders will receive a capital return of about 25 pence per share and payment of 2.8 pence in lieu of a final dividend prior to completion of the deal.

The offer and proposed capital returns together represent a premium of approximately 63 per cent to the closing price of Home Retail stock price on 4 January 2016.

Post closing, Home Retail shareholders will own approximately 12 per cent of the combined group, while the remaining 88 per cent with Sainsbury shareholders.

Sainsbury expects to generate synergies of not less than £120 million in the third full year after completion through relocation of certain existing Argos stores into Sainsbury's stores, procurement benefits, and from the sale of Sainsbury's clothing, homewares and seasonal and leisure ranges through the existing Argos network.

Home Retail said that it "believes in the prospects for the standalone company," but the offer provides an "attractive opportunity" for shareholders.

''The Board of Home Retail Group has indicated to Sainsbury's that it is willing to recommend the key financial terms of the Possible Offer to Home Retail Group shareholders, subject to its fiduciary duties and reaching agreement on the other terms and conditions and the satisfactory completion of reciprocal due diligence,'' it said in a statement.

The merger would create a £6 billion non-food business like John Lewis and Marks & Spencer and will allow it to better compete with online giant Amazon.

Founded in 1869, Sainsbury's operates over 1,200 supermarkets and convenience stores, employs around 161,000 people and holds 16.7 per cent market share.