Sainsbury will pay about 161.3p in cash and stock per Home Retail share, 63% more than the price prior to the emergence of talks.
The companies announced the terms even though they have yet to hammer out a formal offer, and have obtained a three-week extension to a UK Takeover Panel deadline that was due to expire yesterday.
The acquisition would be Sainsbury’s biggest, giving it more than 800 Argos stores and a vastly expanded product delivery network.
The grocer is seeking to fight back in a market beset by discount competition where efficient distribution is crucial to winning over shoppers who want to order online.
About half of the deal’s profit benefits will come from closing some Argos stores and putting them inside Sainsbury’s supermarkets.
“It is a decisive and quite radical move,” said Bryan Roberts, an analyst at TCC Global in London.
“It’s the most courageous attempt yet by a supermarket to tackle the problem of excess space in their larger stores.”