The Co-operative Group has agreed to buy Somerfield for 1.57 billion pounds to strengthen its position as the fifth-biggest food retailer and the market leader in local convenience stores.

The deal steps up the challenge to the big four supermarket groups, some of which have been expanding into the 31-billion-pounds-a-year convenience stores market to tap the trend among time-pressed consumers towards "top-up" shopping.

It is also the boldest move to date in Co-op Chief Executive Peter Marks's plan to revive the mutual retailer, which was the biggest food seller in the 1960s before falling into a decline amid competition from listed companies like Tesco, Asda and J Sainsbury.

"It really leads the renaissance of the Co-op brand," Marks told reporters on Wednesday.

Adding Somerfield's 880 stores to its own 2,300 shops will give the Co-op annual food sales of around 8 billion pounds, or about 8 percent of the food retail market. This closes the gap on fourth placed Wm Morrison, which has a market share of over 11 percent.

Somerfield's owners, a consortium that includes private equity firm Apex, Barclays Capital and property magnate Robert Tchenguiz, put the group up for sale in January and newspaper reports said they were seeking as much as 2.5 billion pounds.

The consortium bought the 880-store chain for about 1.1 billion pounds in 2005.

STORE SALES

Marks said the Co-op might have to sell some stores to address local competition concerns but it was too early to say how many and he was sure there would be strong interest.

A source familiar with the deal said that around 120 stores could be sold.

Bernstein analyst Christopher Hogbin said that, in the short-term at least, the deal could provide an opportunity for the big four supermarket groups to pick up stores and take advantage of any problems integrating the Co-op and Somerfield.

"I wouldn't be surprised to see them (the Co-op) sell the 100 or so bigger supermarkets," he added.

Marks said there would be "significant cost and revenue synergies" from the deal, as well as a "limited number" of job losses, but he declined to give further details.

He said the convenience stores market was growing quicker than the broader grocery market, with soaring petrol prices adding to the attraction of local stores.

The Co-op said like-for-like sales excluding fuel rose 4.7 percent in the 26 weeks to July 12, outperforming the wider grocery market by 0.3 percentage points.

The mutual retailer was created last July from the merger of The Co-operative Group and United Co-operatives and announced a 1.5 billion pound investment drive in April aimed at doubling profits over three years.

The group, which is also the biggest funeral services provider and third-largest pharmacy chain, traces its roots back to the founding of the co-operative movement in Rochdale, northwest England, in 1844.

The Co-op was advised by Credit Suisse, RBS/ABN AMRO and HSBC, while Somerfield was advised by Citi.