ITV has agreed to sell its media and entertainment business to Sky in a deal worth up to £1.6 billion, bringing together the UK’s two largest commercial broadcasters in a bid for the scale needed to compete with American streaming giants such as Netflix and YouTube.

The transaction, first confirmed when the two broadcasters entered talks over the future of ITV’s flagship channels and its ITVX streaming platform, comprises a £1.2 billion cash payment alongside ITV Studios’ £200 million acquisition of Sky’s Love Productions, the company behind The Great British Bake Off.

The FTSE 250 broadcaster also stands to receive an earn-out of up to £200 million if its advertising revenue reaches £1.7 billion next year, a figure broadly in line with last year’s performance.

Under the terms of the agreement, ITV Studios will operate as a distinct global content business, underpinned by a long-term supply agreement with the combined ITV media and entertainment and Sky operation. That arrangement includes a minimum content spend commitment of £2.1 billion between 2028 and 2032, securing the future of the production house widely regarded as the jewel in ITV’s portfolio. The studios arm makes programmes for ITV’s own channels as well as for rival British broadcasters and the American streaming platforms.

Andrew Cosslett, ITV’s chairman, said: “At a time of rapid change in the industry, it is right that we now secure ITV’s crucial role as a public service broadcaster and this transaction achieves this with ITV’s media and entertainment division combining with Sky to create a UK champion with the scale and resources to better compete with global streaming platforms.”

The deal, expected to complete in the second half of next year, will see around £950 million returned to shareholders. ITV will bank net proceeds of £1.05 billion after separation costs of £185 million. Shares in the broadcaster edged 0.9p, or 1.1 per cent, higher to 82.5p in early trading.

Crucially for viewers, ITV and ITVX will remain free-to-air and will continue to carry fan favourites including Coronation Street, Emmerdale and Love Island. Under the ten-year public service broadcasting licences renewed by Ofcom, ITV is required by law to provide a free-to-air service until at least the end of 2034.

Once the deal completes, Sky will also take a 20 per cent stake in ITN, the producer of Good Morning Britain, ITV News at Ten and regional news for London. Sky said there would be no immediate impact on staff at either company, though a “joint integrated team will lead formal consultation on any future structures”.

The tie-up marks the latest reshaping of a UK media landscape under sustained pressure from global streaming. Sky, which provides television, streaming, broadband and mobile services to millions of customers across the UK and Europe, is owned by Comcast, the US media conglomerate that announced plans last month to spin off Sky and NBCUniversal into a standalone, publicly listed media company combining theme parks, film and television studios and the Peacock streaming service.

For SMEs, consolidation among the big commercial broadcasters could further simplify access to premium television advertising, building on moves such as Comcast’s Universal Ads platform, which lets small firms buy ITV, Sky and Channel 4 airtime in minutes.

Dana Strong, Sky’s chief executive, described the agreement as a “defining moment” for British media. A combination of this size would once have faced formidable regulatory hurdles, but the rise of YouTube and streaming services such as Netflix, Amazon and Disney has left established broadcasters with little choice but to seek scale.