Two British supermarket chains, Kwik Save and Somerfield, have confirmed they are to merge.

The news gave share prices in the companies a welcome boost.

The deal, which is worth £1.25bn, will make the new group the fifth largest supermarket chain in the UK.

The BBC's Mary Gahan reports on the implications of the deal (0'33")

The combined group will operate 1,400 stores and is expected to make annual savings of £50m.

During the first year of the merger, the companies will carry out a pilot scheme to find the best trading format for the stores.

Some Kwik Save outlets will be upgraded to Somerfield, while some of Somerfield's Food Giant and Gateway outlets will be converted to Kwik Save.

The companies said the merged group would build on the strength of the two brands.

It will be headed by David Simons, currently chief executive of Somerfield. Kwik Save's chairman, Simon Keswick, will be temporary part-time chairman until there is a permanent appointment.

The group aims to save £50m a year

Kwik Save is strongest in the north of England, with 40% of its stores in Lancashire, the north east and Yorkshire, where Somerfield has just 10% of its stores.

In contrast, Somerfield has more than half of its stores in the south and south west of England and East Anglia, where Kwik Save has only 15% of its stores.

The companies said there was an overlap of 120 stores, some of which would be sold and some of which were already lined up for disposal by the respective companies.

Although the deal is being billed as a merger, Somerfield is making a recommended offer for Kwik Save.

Kwik Save shareholders will receive seven Somerfield shares for every six Kwik Save shares they own. Following the deal, Somerfield investors will own 62.5% of the enlarged group.

Some analysts believe Somerfield's and Kwik Save's high street stores have been left behind by their bigger rivals, led by Tesco, Sainsbury's, Asda and Safeway, who have been at the forefront of the drive to out of town or edge of town superstores.

But Somerfield and Kwik Save said they offered an alternative to the major out of town retailers, giving customers the opportunity to shop locally "at the heart of the community".

Last year Kwik Save, which employs 25,069 people, made a pre-tax profit of £73.7m on sales of more than £3bn.

Somerfield, which employs 45,716 staff, made a pre-tax profit of £105m on sales of £3.2bn.

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