* Shareholders of both firms to have 50 pct of new group
* Levy, Wren to be co-CEOs during initial 30 months
* Head offices to remain in Paris and New York
* Deal expected to generate $500 mln of synergies
* Deal expected to close in Q4 2013 or Q1 2014
Publicis and Omnicom have announced merger plans to create the world's biggest advertising group, worth $35.1 billion, a tie-up that could put pressure on rivals to do deals to keep pace.
The transaction marks a return of jumbo-sized M&A among the world's 'Big Six' advertising groups, which have spent the past few years buying up much smaller targets in emerging markets and among web marketing specialists.
The French and U.S. company presented the deal as a "merger of equals" in which Publicis and Omnicom shareholders will each hold about 50 percent of the new company's equity.
Publicis said the transaction was expected to create "significant value for shareholders", with expected synergies of $500 million. The merged group would keep its head offices in Paris and New York, it said.
"(Omnicom head John Wren) and I have conceived this merger to benefit our clients by bringing together the most comprehensive offering of analog and digital services," Publicis Chief Executive Maurice Levy said in a statement. Levy also said the French government was supportive of the merger.
The deal is likely to push the remaining advertising agencies to consider mergers to keep up. Current leader WPP may make a move for U.S.-based Interpublic, France's Havas or Japan's Dentsu, said Pivotal Research analyst Brian Weiser in a note.
"What would have been unthinkable previously would now make sense," he said.
Together, Publicis and Omnicom had combined 2012 revenue of $22.7 billion, with more than 130,000 employees, and they would overtake WPP, worth $24.1 billion.
The deal would bring together Publicis brands such as Saatchi & Saatchi and Leo Burnett with Omnicom's BBDO Worldwide and DDB Worldwide.
Wren and Levy will be joint CEOs for an initial integration and development period of 30 months, after which Levy will become non-executive chairman and Wren sole CEO, Publicis said.
Publicis shareholders will receive one newly-issued ordinary share of Publicis Omnicom Group for each Publicis share they own, plus a special dividend of 1.00 euro per share.
Omnicom shareholders will receive 0.813 newly issued ordinary shares of Publicis Omnicom Group for each Omnicom share they own, together with a special dividend of $2.00 per share. They will also receive up to two regular quarterly dividends of $0.40 per share.
The companies said the transaction would be a cross-border merger of equals under Netherlands-based holding company Publicis Omnicom Group, with stock market listings in both New York and Paris.
Publicis said the deal, which had been unanimously approved by the boards of both companies, was expected to close in the fourth quarter of 2013 or the first quarter of 2014.
Levy said the merger would boost adjust earnings per share and that the new company would keep its BBB+ debt rating.
The head of rival agency Havas questioned the logic of the merger earlier on Sunday, saying digital business and technology had made scale irrelevant, and that the uncertainties associated with large mergers would distract staff away from clients.
"I'm not sure this is in the best interests of their clients or their talent," David Jones said. "Clients today want us to be faster, more agile, more nimble and more entrepreneurial, not bigger and more bureaucratic and more complex."
The CGT union said the merger would fly in the face of the government's ambitions to preserve French brands, adding that the merged group would be dominated by the U.S. in many areas.
The union called on the French government and competition authorities to avoid a monopoly situation being created, adding that it would mobilise to protect jobs.
Levy said he did not expect resistance to the deal from the French government. "We don't expect that the French government will have anything else other than great support," he said.
Moelis is acting as financial advisor to Omnicom, while Rothschild is advising Publicis on the deal.