TROY, Mich. — Discounter Kmart Holding Corp. is acquiring one of the most venerable names in U.S. retailing, the department store operator Sears, Roebuck and Co., in a surprise $11-billion-US deal that will create the third-largest U.S. retailer.

The combined company under Wednesday's deal would be known as Sears Holdings Corp., but it was clearly orchestrated by Kmart chairman and Sears shareholder Edward Lampert, who will lead a new board dominated by Kmart directors.

Shares of both companies surged on news of the deal.

Kmart shares climbed $16.08 US, or 16 per cent, to $117.30 in trading on the Nasdaq Stock Market, while Sears shares soared $9.42, or 21 per cent, to $54.62 on the New York Stock Exchange.

The new company is expected to have $55 billion in annual revenues and 3,500 outlets. That means it will trail only Wal-Mart Stores Inc. and Home Depot Inc. among the biggest U.S. retailers.

Sears, Roebuck owns about 54 per cent of Sears Canada (TSX:SCC). In Toronto, Sears Canada spokesman Vincent Power said: "For us, nothing is changing, as far as we know. It's business as usual.''

At a New York news conference, Lampert and Sears CEO Alan Lacy said the combined company will be able to take advantage of economies of scale and the prime location of some of Kmart's stores to compete against "big box'' stores like Wal-Mart and Target Corp. Lampert will be chairman of Sears Holdings and Lacy will be vice-chairman and CEO.

The companies expect to achieve annual cost savings of more than $300 million through the combination of their purchasing power, merchandising and a more efficient supply chain.

"We need to have a very low cost structure in order to compete with our biggest competitors,'' Lampert said.

Some Kmart and Sears stores could be transformed into the other's brand name, an option Lampert said is most likely for Kmart stores because Kmart wouldn't work well in Sears' mall locations.

"We want to make sure that the uniqueness of these brands is preserved, but I would say there's no preconceived notion as to which store is going to be which. It's going to be on a store-by-store basis,'' Lampert said.

He wouldn't provide any details on possible layoffs, except to say, "There will be some head count changes that come out of this.''

He said store closings are a possibility. "I think we'll probably end up over time opening more stores than we close, but obviously if we don't operate the stores well, it might be the other way around.''

The deal marks a remarkable comeback for Kmart, a company once known for its "Blue Light Specials'' and which scaled back its operations after seeking bankruptcy protection in 2002.

Sears' roots date to the late 1800s when it offered merchandise by mail order to farmers, opened its first retail store in 1925 and eventually became the biggest U.S. department store operator.

The new company will have its headquarters in the northwestern Chicago suburb of Hoffman Estates, Ill., where Sears has headquarters, but will maintain a "significant presence'' in Troy, Mich., where Kmart is based.

Lacy said he and Lampert have known each other for four years and the idea for a combined company first came under discussion when they were in talks about Sears' purchase of 50 Kmart stores earlier this year.

Under Wednesday's agreement, unanimously approved by both companies' boards of directors, Kmart shareholders would receive one share of new Sears Holdings stock for each Kmart share.

Sears, Roebuck shareholders can choose $50 in cash or half a share of Sears Holdings stock. That portion of the deal values Sears shares at $11 billion, a 10.6 per cent premium over its value at Tuesday's close.

The new 10-member Sears Holdings board would have seven members from Kmart and three from Sears.

Lampert, Kmart's majority shareholder, is also Sears' largest shareholder, holding a 15 per cent stake in Sears through his ESL Investments Inc.

The merger, expected to close by the end of March 2005, is subject to approval by Kmart and Sears shareholders, regulatory approvals and customary closing conditions.

Kmart filed for bankruptcy-court protection in early 2002, leading to the closing of about 600 stores, termination of 57,000 Kmart employees and cancellation of company stock. The retailer emerged from bankruptcy in May 2003 and in March posted its first profitable quarter in three years.

Mired in a retail slump, Sears had long fallen out of favour on Wall Street after losing ground to competitors and enduring sluggish sales for years.

The company last fall introduced its Sears Grand stores, which offer grocery and convenience items besides traditional Sears fare such as clothing, home appliances and tools.

The concept had delivered promising results for the struggling retailer at its first three stores in metropolitan Salt Lake City, Las Vegas and Chicago, in the suburb of Gurnee.

Kmart, in recent years, has been shedding many of its underperforming stores, a strategy that has helped the once-struggling discount retailer bounce back after it emerged from bankruptcy. Kmart recently agreed to sell 50 stores to Sears for $575 million as part of that strategy.

Kmart's earnings have been improving. On Wednesday, Kmart posted net income in the third quarter ended Oct. 27 of $553 million, or $5.45 per share, compared with a loss of $23 million, or 26 cents per share, for the same period a year ago.

Its stock price has risen more than sevenfold from $15 a share when it emerged from bankruptcy.