Dixons and Carphone Warehouse are in merger talks that could create a FTSE 100-listed electricals giant with a market value of £3.5bn.
Together the retailers have more than 3,150 stores and annual sales of nearly £12bn.
In a statement released to the stock exchange the companies insisted talks were at a "very preliminary stage and there can be no certainty that a transaction will be forthcoming". Shares in Dixons jumped 6% to 50p while Carphone Warehouse was up 2.5% at 308p.
News of the potential merger was revealed on financial blog Betaville with the report stating that talks were at an advanced stage and would result in a shares rather than cash based deal.
Carphone Warehouse, founded by entrepreneur Charles Dunstone in 1989, is the larger of the two retailers with around 2,000 stores in seven countries. Last year Carphone had a turnover of £3.7bn.
On Friday's closing price Carphone had a market capitalisation of £1.8bn while Dixons, led by chief executive Seb James, was valued £1.7bn. According to Betaville Dunstone, who owns 23.4% of Carphone Warehouse, is "enthusiastic" about the proposed merger.
There is likely to be scope for considerable cost cutting if the two businesses are combined. Dixons, with 1,154 stores, employs 31,000 people in 12 countries. Last year the Hemel Hempstead-based group had sales of £8.2bn. Both retailers are grappling with structural changes in their industries as sales move online and manufacturers such as Apple dominate the handset market. Dixons is facing stiff competition from website AO.com, formerly Appliances Online, which is gearing up for a £1.2bn flotation.
"No decision has been reached regarding the structuring of any such merger," said the companies in the joint statement. Under stock market rules the two companies now have until 5pm on 24 March to announce whether the tie-up is going ahead.
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