Sainsbury's is currently Britain's second largest supermarket chain (Photo: AFP)

Britain's second and third biggest supermarket chains, Sainsbury's and Walmart-owned Asda, have agreed to merge, the pair said Monday, hoping to create a £13-billion ($18-billion, 15-billion-euro) retail king and leapfrog UK number one Tesco.

The blockbuster deal -- which is effectively a takeover bid with Sainsbury's acquiring a 58-percent stake in the combined group and Walmart the remainder -- comes as long-established UK supermarkets battle fierce competition from German-owned discounters Aldi and Lidl and online US titan Amazon.

Britain's Competition and Markets Authority regulator warned that the deal will 'likely' be subject to a review -- despite terms of the deal saying both brands would be retained and no stores shut.

The government informed parliament that Business Secretary Greg Clark had held talks with Sainsbury's, Asda and unions over preserving jobs.

Analysts said the new group could be forced to sell off some existing stores, most likely in areas where they'd be left with no rival competition.

- Sainsbury's soars -

News of the tie-up sent Sainsbury's share price surging 14.5 percent to 309 pence by the close of trading in London.

Tesco slipped 0.9 percent to 235.9 pence on concerns the group could lose its supermarket crown and possibly also the title of Britain's biggest retailer.

"Sainsbury's and Walmart Inc. are pleased to announce that they have agreed terms in relation to a proposed combination of Sainsbury's and Asda Group Limited, a wholly owned subsidiary of Walmart, to create an enlarged business," they said in a statement.

The transaction values Asda at £7.3 billion. Sainsbury's market capitalisation stood at £5.9 billion at the close of business on Friday.

"This is a transformational opportunity to create a new force in UK retail, which will be more competitive and give customers more of what they want," said Sainsbury's chief executive Mike Coupe.

Sainsbury's added: "The retail sector is going through significant and rapid change, as customer shopping habits continue to evolve.

"This has led to increased competition across grocery, general merchandise and clothing, as customers seek ever greater value, choice and convenience."

The combined business would have total revenues of £51 billion.

"We believe the combination offers a unique and exciting opportunity that benefits customers and colleagues," said Doug McMillon, chief executive of US retail behemoth Walmart.

"We look forward to working closely with Sainsbury's to deliver the benefits of the combination."

The merger deal values Asda at £7.3 billion (Photo: AFP)

'Lower prices'

Sainsbury's said the new group would seek to lower prices by around 10 percent on many popular products, and anticipates cost savings of at least £500 million.

It would meanwhile have a combined 24 percent of the British grocery market, beating Tesco on 22 percent, according to data published by retail consultancy Euromonitor.

Simran Jagdev, analyst at the Economist Intelligence Unit, added: "The deal points to the highly competitive UK grocery market, which has long been concentrated in the hands of the top four players -- Tesco, Sainsbury, Asda, Morrisons -- but is now facing an onslaught from new challengers.

"The transaction will, however, attract regulatory scrutiny, given that the merged companies will become the largest grocery retailer in the UK."

In Britain's fast-changing retail landscape, Sainsbury's previously bought catalogue retailer Argos in 2016 for £1.4 billion.

In March, Tesco completed the purchase of wholesaler Booker -- Britain's biggest cash-and-carry operator -- for £3.7 billion.

At the same time, Amazon has ramped up its 'Fresh' delivery service in Britain, amid speculation that it could decide to buy a UK supermarket group.

Sainsbury's was launched by a young couple, John James Sainsbury and Mary Ann Staples, when they opened a small London dairy shop on the day they married in 1869, according to the company's website.

Asda traces its roots back to the 1920s and was bought by Walmart in 1999.