Sainsbury's In £1.3bn Offer For Argos Owner

Sainsbury (Amsterdam: SJ6.AS - news) 's has agreed financial terms for a £1.3bn takeover with Argos owner Home Retail Group.

The proposed cash and share deal comes after it was revealed last month that an initial offer in November had been rebuffed.

Sainsbury's plans to relocate many Argos stores as concessions using up under-occupied space within its own large supermarkets.

It (Other OTC: ITGL - news) could mean as many as 200 Argos stores closing.

A tie-up would create a £6bn non-food operation putting the new business in the same league as John Lewis and Marks & Spencer (Other OTC: MAKSF - news) and allowing it to take on the might of online giant Amazon.

But the group will not involve Home Retail Group's DIY chain Homebase - once owned by Sainsbury's - which is being sold to Australian giant Wesfarmers for £340m.

The move by Sainsbury's comes as Britain's supermarket sector is facing a ferocious price war, with the market share of the traditional major grocers squeezed by German-owned discounters Aldi and Lidl.

Sainsbury's is seen as having fared better than some of its rivals in facing up to the challenge but believes it needs to improve its online sales and enhance its delivery network in order to grow.

It sees a deal speeding up non-food deliveries and enabling it to widen its range of electronics, appliances and toys.

However, some analysts are sceptical about a tie-up given poor recent trading at Argos and the potential for management being distracted by a merger at a time when the supermarket sector is under huge pressure.

Sainsbury's expects the deal to result in increased earnings in the first full year following completion.

It sees annual savings rising to at least £120m in the third year.

But there will also be store fit-out costs of about £140m over the three years.

Home Retail Group has said it is willing to recommend the deal to its shareholders subject to agreement on other terms.

A "put up or shut up" deadline for finalising the offer has been extended to 23 February.