Asda is receiving no money for the company. It will instead pay pounds 8m for a 40 per cent stake in the enlarged group, to be renamed Allied - in effect a bet on the carpet group's future. Asda is also putting pounds 10m into loan stock.
Asda declined to give the value of stock held in Allied's 111 stores.
Asda also said it was close to selling its 20 Maples furniture stores. The disposals, affecting 2,150 staff, were described by Archie Norman, chief executive, as 'a problem solved'.
Paul Dowling, corporate affairs director, added: 'Allied will consume no further cash, and we will cease to be distracted by it.' Shares in Asda firmed 0.75p to 50.75p.
The sale of Allied and Maples will hit Asda's results for 1993/94, accounting for the lion's share of pounds 123.3m of exceptional debits.
The exceptionals will include a pounds 70m write-off, mainly reflecting the total book value of its historic investment in Allied and Maples.
And there will be a pounds 53.3m charge for goodwill from acquisitions made in the late 1980s and written off in later years. This complies with changes to the Accounting Standards Board's guidelines.
Allied operated at a pounds 4.1m loss in the year to May, and Maples lost pounds 3.8m. They collectively lost pounds 9.8m the year before.
Carpetland has 89 outlets, and the deal makes it the biggest carpet retailer in the UK. Shaun Doran, deputy managing director, said 10 stores would go during integration.
Allied's stores range from 10,000 to 25,000 square feet in size, against 10,000 square feet for Carpetland, which is set to make between pounds 2.5m and pounds 3m pre-tax in the year to January.
Asda's hedge on Allied's future allows it to increase its shareholding to almost 50 per cent depending upon the realisation value of Carpetland on a flotation or trade sale.
'Allied has been in decline for a number of years and threatened further losses,' Mr Norman said. 'The combination of Carpetland and Allied should be a powerful force, with Asda able to participate in its success.'
Carpetland had considered a flotation next year. 'But the focus in the short term is to get the combined businesses into shape,' Mr Doran said.
Allied is raising pounds 15m from preference shares and loan stock issues. CINVen, the venture capital group that backed the management buyout of Carpetland from the receivers in August 1991, is buying pounds 5m of 12.5 per cent preference shares. Asda is ploughing pounds 10m into 12.5 per cent redeemable loan stock.