The holding firms of supermarket chain Ito-Yokado Co. and Seibu Department Stores Ltd. are in the final phase of merger negotiations, industry sources said Sunday.

It the talks are successful, they would result in the birth of Japan's largest comprehensive distribution group with about 4.54 trillion yen in sales as of February 2005, putting it ahead of current industry leader supermarket chain operator Aeon Co. by some 500 billion yen.

The envisioned group would have under its wing department stores, supermarkets, conveniences stores and banks.

According to the sources, the talks involve Seven & I Holdings Co., the holding company of Ito-Yokado and convenience store operator Seven-Eleven Japan Co., and Millennium Retailing Inc., which has two key units -- Seibu Department and Sogo Co.

The merger would effectively be a buyout of Millennium Retailing by Seven & I Holdings, the sources said.

Seven & I Holdings would get hold of the 65 percent stake in Millennium Retailing currently owned by Nomura Principal Finance Co., an investment company wholly owned by Nomura Holdings Inc., and move toward integration of management in the future.

The distribution industry is undergoing major changes as firms race to get bigger and new business models crop up.

Industry insiders said the amalgamation of Seven & I Holdings and Millennium Retailing would enable them to reduce material procurement costs. They also said it could trigger further realignment among retailers.

Seven & I Holdings, formed in September, already has about 70 companies, encompassing department stores, supermarkets, convenience stores, banks and other businesses. It has some 6.6 trillion yen in sales.

It has some 30,000 outlets in 18 countries and regions. Including part-time workers, it employs nearly 700,000 people worldwide.

Millennium Holdings was set up in 2003, under which Seibu Department and Sogo integrated their operations. Sogo sought civil rehabilitation in 2000 and rebuilt its business with Seibu Department's assistance.

Industry watchers said the planned merger is a sign the domestic distribution industry is shifting from saving weak companies to launching more aggressive attacks into new fields.

Sources said Seven & I Holdings' main goal is to boost its competitiveness in other Asian markets, especially China. Because bulk purchasing is the best way to reduce procurement costs, the holding firm had been making every effort to get its group companies to make joint purchases.

But because it still lagged behind the Aeon group, company management opted to increase its scale in one sweep through a merger with Millennium Retailing, they said.