Northern Foods is to merge with rival Greencore of Ireland to create an company that will supply around a third of all ready meals and sandwiches to British supermarkets.
The new company, to be called Essenta Foods, will generate sales of £1.7bn, be valued on the London stock market at about £500m, and employ 16,000 staff.
Essenta's headquarters will be in Dublin, providing a boost for debt-laden Ireland, which is close to agreeing an emergency bailout following a loss of confidence by international investors.
Eoin Tonge, Greencore's group capital markets director, said the deal showed Ireland was still a good place for business with a corporation tax rate of 12% against Britain's 28%.
Northern Foods' manufacturing operations in Ireland will be able to pay corporation tax at the lower rate, although most of its business is based in the UK, where British tax rates will continue to apply.
But Tonge said that, as the new group expanded, new Irish factories could come on stream, attracting lower tax and providing additional employment: "Far from fleeing Ireland, this transaction shows companies are more than happy to do business here."
Northern Foods' best known brands are Fox's biscuits, Goodfella's pizzas and Matthew Walker Christmas puddings. Greencore makes Aunt Bessie's sauces and Weight Watcher ready meals on licence.
Both companies generate most of their sales by supplying own-label chilled meals sold under the names of the big supermarkets, which are their biggest customers. Northern Foods has a strong relationship with Marks & Spencer and Tesco, while Greencore has long-standing links with Asda and Sainsbury.
"There is remarkably little overlap between the two businesses, so we are not envisaging swathes of redundancies or factory closures," said analysts at Shore Capital.
Greencore chief executive Patrick Coveney will assume the same role at the combined group, while Northern Foods CEO Stefan Barden will leave the company once the merger is completed in the second quarter of 2011. He will be eligible for a multimillion-pound payoff that is currently under negotiation.
Anthony Hobson, chairman of Northern Foods, will take up the same position at Essenta, while Northern's finance director, Simon Herrick, will become the chief financial officer.
Shareholders in Greencore and Northern will hold about 50% of the share capital of the enlarged group.
Charlie Mills, analyst at Credit Suisse, suggested the deal could be disrupted by a private equity interloper: "The decision to merge may well encourage third parties to look at Northern: remember it has extensive interests in industries controlled by private equity – notably biscuits and frozen foods."
The new company envisages annual cost synergies of £40m to be achieved by scaling back Northern Foods' Leeds head office, an undisclosed number of redundancies, tax efficiencies and purchasing and supply chain improvements.
Britain's ready meals market has been plagued by overcapacity, with an explosion of activity after M&S first introduced pre-prepared dishes in the early 1990s.
Northern Foods earned a reputation for issuing annual profits warnings, but under Barden, who took over in 2007, the company has chased profits instead of volume with growing success. As a result, Northern has undergone painful restructuring involving factory closures as Barden has severed unprofitable contracts.
Graham Jones, a food industry analyst at Panmure Gordon, said: "The merger takes capacity out of the chilled convenience food market where suppliers have struggled to get supermarket customers to pay them enough to be able to make a sensible economic return.
"The key question here is how much 'rebalancing' the supermarkets will do if they feel overexposed to the new combination. Hopefully this will have been realistically estimated by the two boards."
Meanwhile, heavily indebted Premier Foods says it has received approaches that could lead to a sale of its East Anglian canning operations. Premier is under shareholder pressure to cut borrowings of £1.4bn.