US retailer Federated Department Stores Inc is to buy competitor May Department Stores Co in an $11 billion deal which will create the biggest department store chain in the United States.

The new business, which will combine the Bloomingdale's, Macy's and Marshall Field's chains, will operate over  900 department  stores as well as the David's Bridal and After Hours formal wear chains, and is expected to generate annual sales of around $30bn.

Negotiations between the two companies stepped up in the past few weeks after May's chairman and chief executive Gene Kahn quit in January.

May, which is based in St Louis, has been hit by flagging sales due to increased competiton at the top and bottom ends of the market, coupled with large debt financing to fund the $3.24bn purchase of the Marshall Field's business last year.

Cincinnati-based Federated said it expects $1bn worth of costs related to the transaction over the next three years, but hopes to save $450 million as a result of the deal, with accretive earnings being recorded by 2007.

The new business will be the third-largest retailer of general merchandise in the US, behind Wal-Mart and Sears.

Federated and May said they were not planning to consolidate any units or change store names before 2006. However, it is likely that the majority of May's regional stores will eventually operate under the Macy's name.

The deal is expected to be finalised in the third quarter of 2005 and is subject to regulatory approval.

Federated's chief executive officer Terry Lundgren said that the merger would make the two companies "better able to offer value and an improved retail experience," with an improved selection of goods and more competitive service and pricing.

Lundgren added that the businesses would be better equipped to "meet competitive challenges in the retail marketplace and better able to realise growth opportunities over the longer term."

Federated sells men's, women's, and children's apparel and accessories, cosmetics, and home furnishings through its Macy's, Bloomingdale's, Bon-Macy's, Burdines-Macy's, Rich's-Macy's, Lazarus-Macy's, and Goldsmith's-Macy's chains in the US, Puerto Rico and Guam.

The May Department Stores Company operates the Lord & Taylor, Marshall Field's, Filene's and Kaufmann's, Robinsons-May and Meier & Frank, Hecht's and Strawbridge's, Foley's and Famous-Barr, LS Ayres and The Jones Store in the US and the District of Columbia as well as the May's Bridal Group.