(Reuters) -German biotech firm BioNTech has agreed to acquire domestic peer CureVac ( CVAC ) for about $1.25 billion worth of BioNTech shares, it said on Thursday, to boost its work on new mRNA-based cancer treatments.

Under the deal, which pairs two former rivals in the race to develop COVID-19 vaccines, CureVac ( CVAC ) shareholders stand to receive a premium of 55% over the three-month average share price, and leave them with a stake of about 4%-6% in BioNTech, the suitor said.

CureVac's ( CVAC ) Frankfurt-listed shares surged 27% to a five-month high, valuing the company at 1.04 billion euros ($1.2 billion), while BioNTech shares were down 2% by 1237 GMT.

The deal further underscores BioNTech's long-term pursuit of new cancer treatments as it aims to show that its success as Pfizer's ( PFE ) COVID-19 vaccine partner, which left its balance sheet flush with billions of euros in cash, was not a fluke.

"With the acquisition, BioNTech aims to strengthen the research, development, manufacturing, and commercialization of investigational mRNA-based cancer immunotherapy," it said.

CureVac ( CVAC ) opted to focus on oncology about a year ago when it agreed to sell its remaining influenza and COVID-19 vaccine development to alliance partner GSK.

It had previously cut jobs as it sought to move beyond its failure to develop an mRNA-based COVID vaccine during the pandemic.

GERMAN BIOTECH CHAMPION

The agreement is also set to end CureVac's ( CVAC ) years-long legal fight over alleged mRNA patent infringement by BioNTech and for a share of vaccine revenues, where CureVac ( CVAC ) has made little progress.

CureVac ( CVAC ) shares were worth as much as 120 euros in December 2020 on hopes it would develop a COVID vaccine, more than double their initial public offer value in August of that year. They are now trading at 4.65 euros.

BioNTech won a major shot in the arm for its cancer drug activities last week when Bristol Myers Squibb ( BMY ) agreed to pay up to $11.1 billion to jointly develop a next-generation cancer immunotherapy that could take on rival Merck & Co's ( MRK ) best-selling drug Keytruda.

Each CureVac ( CVAC ) share will be exchanged for about $5.46 in BioNTech American depositary shares, or ADS, but subject to a so-called collar mechanism, BioNTech said.

If the 10-day volume-weighted average price of BioNTech ADS shortly before the closing of the offer exceeds $126.55, the exchange ratio would be 0.04318, and if the price is lower than $84.37, the exchange ratio would be 0.06476.

BioNTech said the deal was supported by SAP SE co-founder and football investor Dietmar Hopp, who holds a stake of about 37% in CureVac ( CVAC ).

The German government, owner of about 13% in CureVac ( CVAC ) for its financial backing during the pandemic, said it welcomed in principle the creation of a "new German biotech champion", and that it would review the offer.

($1 = 0.8624 euros)

(Additional reporting by Christian Kraemer; Editing by Friederike Heine, Jan Harvey and Emelia Sithole-Matarise)