Sammy will acquire Sega in a stock deal worth $1.4 billion, according to Reuters.
Merger negotiations had previously fallen-through once last year.
The combined companies' annual sales are predicted to exceed 440 billion, or $3.84 billion, overtaking rival Konami Corp.
The two companies said they would create a new holding company, Sega Sammy Holdings Inc, of which Sammy will hold a 95.3 percent stake.
Each share of Sammy will be swapped for one share of Sega Sammy, while each share of Sega will be swapped for 0.28 share.
The two companies aim to close the deal Oct. 1 with Sammy Chief Executive Hajime Satomi heading the new company. The firms' respective stocks will be withdrawn from the Tokyo Stock Exchange on Sept. 27.