The cash and stock deal combines the No. 2 and No. 3 supermarket chains in Britain, to create the country's largest group by market share, overtaking long-standing leader Tesco. The supermarkets said the union, which would result in a group with £51 billion (€58 billion) of sales, would cut costs for consumers.
The blockbuster deal which is effectively a takeover bid with Sainsbury's acquiring a majority 58 per cent stake comes as the British supermarket sector faces squeezed profit margins and fierce competition from German-owned discounters Aldi and Lidl and online USA titan Amazon.
Both Sainsbury's and Asda, owned by American groceries giant Walmart (which will retain a 42 per cent stake in the new venture as well as receiving £3bn in cash), are facing pressure on their sales from the burgeoning success of budget brands such as Aldi and Lidl.
Investors betting against Sainsbury's were dealt. The company pointed out that, in completing the transaction, including winning regulatory approval, which could extend into the second half of calendar year 2019, Walmart has not yet determined the timing of the loss.
Sainsbury's is valued at around £5.9 billion.
"This is a transformational opportunity to create a new force in United Kingdom retail, which will be more competitive and give customers more of what they want now and in the future", said Sainsbury's chief executiveMike Coupe. "We see no chance of it getting through the CMA without a major dismemberment of the combined business", Peel Hunt analyst Charles Hall said, adding Morrisons was the only viable buyer of a large chunk.
The two companies have different cultures and appeal to different customers, with London-based Sainsbury's strong in own-brand products, and Asda, headquartered in Leeds, northern England, focused on price. Sainsbury's bought Argos in 2016 for 1.1 billion pounds.
The Forum of Private Business (FPB) has called on Sainsbury's to provide assurances to its supply chain, as the supermarket chain announces it has agreed terms with Asda to merge the two companies.
The new chain would have a 31.4 per cent market share, compared to 27.6 per cent for Tesco - giving the "big two" a near 60 per cent share of Britain's groceries market.
The Qatar Investment Authority, which has tried to buy Sainsbury's in the past, is now the supermarket group's biggest shareholder with a 22% stake.
Sainsbury's also reported its full-year results, showing a first rise in profit in four years and expressed confidence in meeting analysts' profit forecasts for 2018-19.