Boots and Alliance UniChem are taking on the might of the supermarkets after agreeing to create a pharmacy giant with 2,600 stores in the UK and £13 billion of sales.
The new company is to be called Alliance Boots and will become the largest drugs retailer and wholesaler in the UK, with a network across ten other European countries.
The deal does not include the sale of Boots Healthcare International which is currently in progress.
Executives yesterday said the "merger of equals" would provide a platform for the Boots brand to expand abroad and generate at least £ 100 million of savings within four years, partly through an estimated 1,000 job losses.
Effectively doubling in size to be valued at about £7 billion, the business will have more purchasing power to secure better terms from suppliers and lower prices to compete with supermarkets which have been eroding the sales of Boots.
The firm has more than 1,400 stores in the UK while Alliance UniChem has 939 outlets.
Boots executives Richard Baker and Nigel Rudd will get the top jobs in the new Alliance Boots group, while Boots shareholders will get slightly more than half of the shares,
Mr Baker, chief executive of Boots, was confident the deal would clear all competition hurdles as the retailer has only 12 per cent of the UK market for selling medicines.
He said: "We don't believe that this merger will be anticompetitive. Both boards feel that this is in the interests of customers and patients in the UK."
Healthcare was seen as the growing market and the deal fulfilled Mr Baker's pledge to investors in March to put "the chemist back into Boots".
A marriage is expected to lessen the impact of the Government cutting down the amount of money it pays chemists for selling national health prescriptions.
Scared by their populations becoming older, European governments generally are focusing on driving down healthcare costs and are introducing rules that would benefit a combined business, Boots said.
Shares in Boots surged seven per cent and Alliance was ahead by four per cent, although the lukewarm response of analysts to the merger plan suggested many in the City are betting on a rival bidder emerging. Superdrug owner AS Watson and private equity groups have been mentioned as possible suitors for the 156-year-old retailer.
However, Mr Baker tried to dampen down expectations of a counterbid saying: "There is no other current interest, I cannot be more explicit."
Seymour Pierce retail expert Richard Ratner said the deal smacked of desperation, adding that the original turnaround strategy of Boots now appeared to be out of the window.
Nick Bubb, of Evolution Securities, said he was also underwhelmed. "Though we can see why Boots want to run for cover in the current environment and bulk up to take on the supermarkets, the group has not exactly proved its current strategy and we are suspicious as to why Alliance UniChem are so keen on a merger."
Talks between the two firm have taken place since late spring, although Alliance UniChem executive deputy chairman Stefano Pessina has nurtured plans for a merger for five years.
Mr Pessina said: "We expect Alliance Boots to be a very acquisitive company. With new strength on the balance sheet and the Boots name, we will accelerate our acquisitions programme."
The key advantage of the deal was the chance to expand the Boots brand on to the Continent with the aim of generating half of its profits overseas by 2010, he said.
Shopworkers' union Usdaw said it was seeking talks with managers at both firms on the implications of the deal.
General secretary John Hannett said: "We have long standing agreements with both companies which is good news for our members as we will be able to use those positive relationships to protect the interests of our members.
"We are seeking meetings with both companies this week to find out exactly what the long term implications are for our members as company briefings to staff have made it clear that any significant changes will not happen overnight."
"This merger is designed to make sure the new company has enough firepower to meet the challenges from the supermarkets but we want to make sure the loyalty of staff at both companies is recognised and rewarded with the sort of security this merger is intended to provide."