U.S. department store chain J.C. Penney Co Inc is to buy a 16.6 percent stake in Martha Stewart Living Omnimedia Inc for $38.5 million, the New York Times said, citing people briefed on the matter.

J.C. Penney will pay $3.50 a share for the stake, a 12 percent premium to Martha Stewart Living's closing price on Tuesday and will get two seats on the board, the newspaper said.

Under a 10-year partnership, J. C. Penney will introduce ministores and a revamped online presence for the Martha Stewart Living brand beginning in February 2013, the sources told the New York Times.

It said the arrangement is expected to fetch Martha Stewart Living, a diversified media and merchandising company, more than $200 million, including royalty payments, design fees and advertising commitments.

In May, Martha Stewart Living hired Blackstone Group to explore opportunities to sell or find a partner after several years of sales declines in its magazine publishing, television and merchandising businesses. Between 2007 and 2010, revenue fell by more than a quarter.

Representatives for J.C. Penney and Martha Stewart declined to comment to the New York Times.

Neither party was immediately available for comment to Reuters.

(Reporting by Rachana Khanzode in Bangalore; Editing by Hans-Juergen Peters)