International Power has agreed a tie-up with French utility GDF Suez, bringing to an end months of negotiations between the two parties.
Under the terms of the deal, GDF's international assets will be transferred to International Power.
GDF shareholders will then own 70% of the newly-formed company, with International Power owning 30%.
International Power shareholders will receive a special dividend of 92 pence a share.
This amounts to a total cash payment of £1.4bn.
The UK group said that the combined company, to be named New International Power, would be able to make cost savings across the two existing businesses of £165m a year, with three-quarters of these savings achieved in the second year.
It added that the deal would also enhance growth prospects in Latin America, Asia and the Middle East.
The new board will comprise members of both companies. Philip Cox, the current chief executive of International Power, will take up the same position at the new company.
"This is a strong combination of two world-class businesses that have a highly complementary geographic footprint," said Sir Neville Simms, International Power's chairman.
The tie-up will be recommended to International Power shareholders, who need to approve the deal. However, International Power said it expected to complete the tie-up "at the of 2010 or early 2011".
The new company will be listed on the London Stock Exchange.
International Power operates 45 power stations across 21 countries, including six plants in the UK, and achieved total revenues of £3.5bn in 2009.
GDF Suez is a much larger company, with revenues of 79.9bn euros last year.