* Combined sales forecast exceed 1 trln yen
* Cocokara had also considered tie-up with Sugi Holdings
* "Matsukiyo" pioneered drugstore sales of discountcosmetics
*(Updates with company confirmation, adds industry background)
By Ritsuko Ando
TOKYO, Aug 14 (Reuters) - Japanese drugstore giantMatsumotoKiyoshi Holdings said it was starting talks tomerge with rival Cocokara Fine Inc, possibly creatingthe country's biggest chain of discount pharmacies with nearly$10 billion in annual sales.
Cocokara Fine shares briefly jumped 9% on Wednesday afterthe company said it had decided to negotiate a potential mergerwith the bigger MatsumotoKiyoshi. It had considered a tie-upwith another drugstore chain, Sugi Holdings, but chosean offer from MatsumotoKiyoshi instead, it said in a statement.
The companies said they could not comment on details ofnegotiations, such as possible terms and deadlines for thetalks.
Known as "Matsukiyo", MatsumotoKiyoshi started as amom-and-pop pharmacy in the 1930s and has grown rapidly throughaggressive store openings and acquisitions. It was a pioneer indrugstores' sales of discount cosmetics, allowing consumers tomore casually sample products.
It and other major drugstores have also expanded intosnacks, soft drinks, and liquor, dealing a blow to the country'sconvenience stores and supermarkets. But drugstores, like therest of Japan's retail industry, are now grappling with adwindling workforce and tough price competition.
"It will not be easy to overcome business challenges on ourown, and therefore it is appropriate for us to merge," Cocokarasaid in a statement.
"By combining with MatsumotoKiyoshi Holdings ... there is achance of creating major synergies such as improving workefficiency and developing private brand products."
A merged company will earn over 1 trillion yen ($9.4billion) in annual sales, topping sector leaders Welcia Holdingsand Tsuruha Holdings.
Shares in Cocokara Fine surged to their highest sinceNovember 2018, and were up 1.3% in mid-afternoon trade, whileMatsumotoKiyoshi shares fell 2%.
Shares in Sugi, which said it would look for other potentialpartners, rose around 2%.
($1 = 106.2900 yen)(Reporting by Ritsuko Ando; Editing by Muralikumar Anantharamanand Stephen Coates)