J Sainsbury has agreed to buy Argos owner Home Retail Group for about £1.3 billion, combining two of the UK's biggest retailers in an effort to fight back against competition from discounters and online merchants.

Sainsbury will pay about 161.3 pence in cash and stock per Home Retail share. The grocer made an initial approach in November that was rejected, and negotiations stalled in late January over the price, four people familiar with the matter previously told Bloomberg News.

The acquisition would be Sainsbury’s biggest, giving it more than 800 Argos stores and a vastly expanded product delivery network. The grocer is seeking to fight back in a market beset by discount competition where efficient distribution has become crucial in winning the increasing number of shoppers that want to order online.

Buying Home Retail will help Sainsbury to make better use of unproductive store space. Last year, the grocer began introducing Argos outlets in its supermarkets. It has said that about a quarter of its stores have some under-utilised space, which it intends to fill with clothing, other non-food items and in-store concessions. Yet by moving further into product categories including jewelry, televisions and furniture, Sainsbury risks straying further onto the radar of Amazon. com Inc. It already faces stiff competition in its main grocery business from discounters Aldi and Lidl.

The proposed deal would lead to a full break up of Home Retail. The group was formed in 2006 when Argos, home improvement chain Homebase and a financial services business were spun off from GUS Plc. The company agreed to sell Homebase to Wesfarmers for £340 million in January, simplifying Sainsbury's effort to gain control of Argos.

Sainsbury’s bid comprises 0.321 new shares and 55 pence in cash for each Home Retail share. Home Retail wanted at least 170 pence a share, and Sainsbury was unwilling to pay more than 150 pence, one of the people familiar with the situation said last month.

Bloomberg