Dubai Ports offered 443 pence per share in an all-cash bid for P&O, a 165-year-old maritime icon formed at the height of Britain's sea power, as part of an ambitious expansion strategy for Asia and Europe.
The Gulf company's offer price was a 46 percent premium to P&O's trading price before October 30 when P&O confirmed it had been approached by a potential bidder.
P&O shares were up 0.7 percent at 438 pence at 1404 GMT.
The deal follows a string of recent takeovers of major British companies. It is also the latest big purchase by Dubai-government-linked firms scouring the globe for assets to invest the Gulf emirate's mountain of oil cash.
"I think this is an acceptable price. There is a lot of potential and brand value in the P&O assets, and Dubai Ports is well positioned to exploit it," said Wadah Al Taha, a senior economic analyst at a bank in the neighboring emirate of Abu Dhabi.
The Dubai Ports-P&O operation will be the world's third-largest ports operator after Hong Kong's Hutchison Whampoa at No.1 and Singapore government investment agency Temasek Holdings Pte. Ltd. in second place, it said.
Analysts said a rival bid now appeared unlikely. Hutchison, Temasek and Denmark's Moeller-Maersk had been rumored as potential counter bidders.
"P&O's board has unanimously recommended the offer and together with provisional acceptances for 19 percent of the group's shares a counter offer is unlikely," Investec analyst John Lawson said.
Dubai Ports, created by the merger of two state-owned entities in September, said it planned to retain P&O's management, staff and its UK-France ferries business. It said the deal was about expansion rather than cost-cutting.
"This clearly fits into the broader strategic picture given Dubai's ambitions to position itself as a hub, not just of shipping but of business," said Zahed Chowdhury, Head of Research, HSBC, Dubai.
Analysts and Dubai Ports executives said they did not anticipate any regulatory opposition. The deal is expected to be wrapped up by the first quarter of next year.
P&O Chairman John Parker said the company had not received any rival approaches from third parties but it was too early to speculate.
P&O, whose full name is Peninsular & Oriental Steam Navigation Co. , earns about 80 percent of its profits from ports in Asia, the Americas and Europe.
The company is the world's fourth-largest ports group, and its brand-name still appears on cruise ship operations it no longer owns.
Dubai Ports Chairman Sultan Ahmed Bin Sulayem, one of Dubai's most powerful businessmen, told reporters on a conference call the deal included ownership of P&O's less-profitable UK-France ferries business.
P&O would remain headquartered in London, and Chief Executive Robert Wood would stay on as chief, he said.
P&O also expects UK government approval for a 1.5-billion-pound container port and business center near London by early next year.
"We are very bullish about this acquisition. We have always been in growth mode and we will continue to do this," bin Sulayem told reporters, tipping further expansion in India and Europe.
One of the sticking points in talks had been P&O's pension deficit. Dubai Ports agreed to inject 125 million pounds into the UK firm's pension scheme, leaving a deficit of 75 million pounds to be paid over five years.
Dubai Ports said it would finance the deal through a combination of debt and equity.
Dubai Ports' previous major acquisition was in December 2004 when it paid $1.15 billion for the global port assets of U.S.-based CSX Corp. (CSX).
Deutsche Bank was financial adviser and corporate broker for Dubai Ports on the deal. Citigroup and Rothschild advised P&O. Citigroup and Morgan Stanley were corporate brokers to P&O.