Swedish steelmaker SSAB said on Wednesday it will acquire Finnish competitor Rautaruukki, hoping to reduce costs and boost competitiveness in the sluggish steel market.
The announcement caused the price of shares in the two groups to leap.
The acquisition will take place through a public share exchange offer to Rautaruukki's shareholders with a 20-percent premium on the average share price of both companies over the last three months.
These terms value the deal at 10.1 billion kronor (1.15 billion euros, $1.56 billion).
"In the steel industry, a combination of SSAB and Rautaruukki has for long been considered logical and the time is now right to pursue this transaction," chairman of SSAB's board of directors Sverker Martin-Loef said in a statement.
The companies said that the resulting Nordic and US-based company would save 1.4 billion kronor per year thanks to more efficient and flexible production.
"I believe that the combination of Ruukki and SSAB gives an excellent opportunity to continue the rationalisation of the cost base of the companies and build a new Nordic steel producer," Rautaruukki chief executive Sakari Tamminen said.
SSAB has pinned its recovery hopes on this acquisition after posting accumulated losses of 1.55 billion kronor for five consecutive quarters since summer 2012.
Rautaruukki has also experienced financial difficulties in the last years.
The Finnish company lost 117 million euros in 2012 and stayed in the red during the first three quarters of 2013 with four million euros in losses.
The combined group will offer high strength steels, standard strip and plate products as well as tubular products.
The firms, with approximately 8,700 employees each, said they would lay off around five percent of their workforce -- some 900 workers --, mostly in Sweden and Finland, over a three-year period following the operation.
The Finnish metal industry union Metalliliitto expressed its concern in a statement.
"In the last few years, the workers of Rautaruukki have been working in very difficult conditions," union head Riku Aalto said.
"They are not to blame for the difficulties of the company, so they should not be made to pay the price of the acquisition."
Its Swedish counterpart, however, said the operation could have positive consequences for the employees.
"The steel market is under high pressure in the entire world," the head of IF Metall Anders Ferbe said in a statement.
"The combination of SSAB and Ruukki could be what is needed to guarantee the jobs in the future."
The price of shares in both companies soared on Wednesday after the announcement.
In early trading, SSAB's shares were up by 15.43 percent on the Stockholm stock exchange in an overall market up 0.28 percent, while Rautaruukki's share price soared by 29.39 percent on the Helsinki stock exchange, where the main index was also up by 0.70 percent.
The steel industry has faced difficult conditions since the beginning of the financial crisis in 2008, with the market hit by falling demand.
Several companies in the sector have reacted with mergers and acquisitions in an attempt to reduce costs and weather the storm.
Another Finnish company, Outokumpu became in 2012 the world leader in stainless steel after buying German ThyssenKrupp's Inoxum.