Pernod-Ricard said it had struck a deal with Allied Domecq's board and that the proposed takeover would catapult the firm to number one spirits company outside the US, providing a strong rival to global spirits market leader Diageo.
Pernod also said it could save more than £200 million (€300 million) per year in costs across the two businesses by bringing them together.
Philip Bowman, chief executive of Allied Domecq, said this would be important in the face of margin pressure: "Competitive and economic conditions in the first half of 2005 have been tough. Against this backdrop the need for further consolidation in the distilled spirits industry is increasingly apparent."
If Allied shareholders agree to the deal, Pernod would be helped through the acquisition of core spirits brands such as Beefeater gin, Malibu and Stolichnaya vodka as well as premium wines including Montana and Campo Viejo.
But, the firm has also agreed to sell a range of Allied's brands to US firm Fortune Brands for £2.8 million (€4.1 million) cash.
These include Canada Club, Courvoisier, the super-premium Clos du Bois Californian wine brand and Allied's US wine distribution network in the UK, Germany and Spain. Pernod will also sell its own Larios brand.
The move is thought to be an attempt by Pernod to head off competition authorities that may challenge its takeover of Allied due to the resultant market concentration.
Pernod said it hoped to have the deal with Allied wrapped up within three to four months and would pay shareholders 670 per pence per share. The sale to Diageo is expected to take around six months.
The French-based firm added that it planned to pay for Allied by borrowing around £6 billion (€9 billion) from a range of lenders including Morgan Stanley, Royal Bank of Scotland and French bank BNP Paribas.
So far no competitors have emerged to rival Pernod's offer, though Allied has agreed to pay £37 million if it is beaten by a competing offer within the next six months.
Allied announced a seven per cent rise in net profits this morning to £285 million, though overall sales were flat at around £1.7 billion. Sales of spirits and wine crept up one per cent to £1.236 billion.
Allied's US market was the main growth driver, improving operating profit by 14 per cent with good performances from Malibu and Stolichnaya, while an economic slow-down hampered profits in the firm's other big market, western Europe.