American discount store operator Family Dollar's shares surged 25% in premarket trading in New York on news that larger rival Dollar Tree had agreed to acquire it for about $8.5bn.

The deal is expected to create North America's leading discount retailer.

Family Dollar's stock shot up 25.44% to $76.09 on 28 July.

Dollar Tree's stock jumped 11.12% to $60.25 at 0851 EDT in New York.

The deal offers Family Dollar shareholders $59.60 (£35.09, €44.35) in cash and $14.90 in stock for each share they hold, according to a Dollar Tree statement.

Family Dollar had about 114 million shares outstanding as of 5 July.

The transaction is subject to Family Dollar stockholder approval, expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other customary closing conditions, the statement added.

Dollar Tree intends to finance the acquisition through a combination of existing cash on hand, bank debt and bonds.

Dollar Tree's offer of $74.50 per share in cash and stock represents a 22.8% premium over Family Dollar's close of $60.66 on 25 July, according to the statement.

Morgan Stanley advised Family Dollar while JPMorgan Securities was the financial adviser to Dollar Tree.

Family Dollar targets lower-income shoppers while Dollar Tree caters mostly to the middle class.

Activist investor Carl Icahn, Family Dollar's largest shareholder with a 9.4% stake, wanted the company to sell itself to Dollar General to help it deal with tough competition from retailers such as Wal-Mart Stores.