Arch Communications Group Inc., the second-largest U.S. paging services company, agreed to buy larger rival Paging Network Inc. for about $1.36 billion in stock and assumed debt to keep competitive with wireless phone companies.

Arch Communications will exchange 0.1247 shares, or about 85 cents, for each share of Paging Network, also known as PageNet. That is 12 percent below PageNet's Friday closing price of 97 cents a share.

PageNet, with 9 million subscribers and $1.05 billion in sales last year, hasn't made a profit since it first sold shares to the public in 1991.

As part of the transaction, the companies want to convert about $1.6 billion in debt and preferred shares into common stock of the combined company. Dallas-based PageNet warned that it may file for Chapter 11 bankruptcy protection if enough investors don't agree to the debt conversion.

PageNet and other paging companies have struggled as prices declined and new wireless phones with built-in pagers were introduced, slowing growth in customers.

"This is the best of poor alternatives," said Sean Egan, a managing director at Egan-Jones Ratings Co., which rates corporate bonds. "No matter what, the bondholders are going to have to take a haircut."

PageNet's bondholders will own about 44.5 percent of the combined firm, getting about $523.9 million in stock, based on Arch's Friday closing price. PageNet has $1.2 billion in senior notes and about $804 million in bank debt.

"It's either this or Chapter 11, where the legal costs will eat up what's left of the company," said Egan, who rates PageNet's debt "C" and projects that the company's notes will fall into default.

PageNet, which has fallen about 78 percent this year, rose 6 1/4 cents, to $1.03 1/8, on the Nasdaq Stock Market. Shares of Arch, which have risen about 43 percent this year, fell 62 1/2 cents, to $6.18 3/4, also on Nasdaq.

Arch and PageNet expect to generate about $80 million in cost savings annually in the first two years of the combination and have revenue of $1.7 billion.

"The combined company will have an appropriate capital structure and the financial flexibility needed to fuel long-term growth," John Frazee Jr., PageNet's chairman and chief executive, said in a statement.

The company will be called Arch Communications and be based at Arch's Westborough, Mass., headquarters. PageNet's Frazee will be chairman of the new company, while C. Edward Baker Jr., chairman and chief executive of Arch, will be its chief executive.