Supermarket group Sainsbury's and Argos-owner Home Retail have agreed a £1.3 billion (€1.7bn) deal that will create the UK's largest non-food retailer, leapfrogging Tesco's general merchandise operations as well as both John Lewis and Marks & Spencer.

The Sainsbury's-Argos combination will have some 25 million customers, operating a chain of about 2,000 stores.

Agreement on the deal was reached on Tuesday, hours before a “put up or shut up” deadline imposed by City takeover rules. Now the two sides will open up their books to each other and have three weeks to finalise formal terms.

For Home Retail shareholders, the cash and shares offer outlined on Tuesday is worth 161.3p a share, a substantial premium on the 100p level at which the shares were trading early last month, before news of Sainsbury’s interest emerged.

Appeasing shareholders

That values the business at £1.1 billion, but shareholders will also receive £200 million – worth 25p a share – from the recently agreed sale of Home Retail’s

Homebase

DIY chain to an Australian company.

The terms look to have been settled skilfully enough to satisfy both sets of shareholders, appeasing the fears of Sainsbury’s shareholders that it would pay too much while also easing worries of investors in Home Retail that they will be bought on the cheap.

Some rather inventive financing from Sainsbury’s, involving a transfer of Home Retail’s loan book of around £600 million to Sainsbury’s Bank, has also reduced the risk.

Reaction in the City when Sainsbury's interest in Argos was first revealed was distinctly cool. Since then, however, the supermarket group and its chief executive Mike Coupe have made a fairly convincing case for the deal.

Some 40 per cent of customers shop at both Argos and Sainsbury’s and Coupe intends to take full advantage of cross-selling opportunities. Argos will open up additional sale and delivery channels to Sainsbury’s, online, in-store and via mobile.

There will be store closures where the networks overlap and Argos outlets will be opened in Sainsbury’s stores. Head office jobs will also go. In total, Sainsbury’s says it expects savings of £120 million within three years.

Argos, with its wide range, will provide another avenue for growth for Sainsbury’s. But Argos has itself been struggling and some analysts remain unconvinced.

A particular worry is that the work involved in integrating the two businesses will distract Coupe and his management team from the task of keeping Britain's second-largest food retailer on track against the continued onslaught of Aldi, Lidl and now Amazon.

Easy entrance

As Sainsbury’s takes a big leap into general retailing, a grocery sector outsider is attempting to take on Aldi and Lidl with a new store offering basic food products at rock bottom prices.

EasyJet founder Stelios Haji-Ioannou – who knows a thing or two about budget prices if not food retailing – has just opened his first easyFoodstore in Park Royal in northwest London.

Sited in a former office building alongside the easyBus depot on the North Circular Road, the discount food store with its gaudy easyJet orange frontage, is more basic even than the German discount chains. It stocks a range of 76 basic grocery products, from tinned beans and spaghetti hoops to instant noodles, crisps, pasta and cakes.

Everything is being sold at 25p to pull in the punters in its first month, with prices to double to 50p thereafter, still significantly cheaper than other food retailers.

Haji-Iannou sees the store as halfway between food banks and the hard discount chains and believes there is a big, unserved market there to be tapped. If the first store is successful, he plans to expand the chain within the M25 area.

It’s certainly cheap, so cheap, in fact, that you could buy every item on offer and still have change from £20. Fiona Walsh is business editor of theguardian.com