Sanofi said it would start a tender offer for all of Chattem's shares at $93.50 per share, a premium of 34 percent over Friday's closing price.
Chattem shares rose 32.8 percent to $92.95 in early trade, while Sanofi was down 0.07 percent at 54.62 euros.
The deal fits with Sanofi Chief Executive Chris Viehbacher's plan to broaden the group's business away from prescription drugs, aiming to offset looming sales losses of older drugs due to generic competition and to new branded rivals.
He said the total U.S. OTC market was worth $20 billion.
The French group has targeted partnership deals to find new drugs and takeovers of up to 15 billion euros ($21.5 billion) rather than pursuing mega-mergers -- a tactic preferred by rivals like Pfizer and Merck & Co .
It looks for me an interesting deal to generate a lot of synergies, said Timo Kuerschner, analyst at LBBW.
It's a special Sanofi-Aventis theme, because they have the greatest need to move something.
Either they go into generic business or they have to do a deal like this one, and this one for me makes more sense and is better, Kuerschner said, adding the premium of 34 percent looks reasonable.
Sanofi chief financial officer Jerome Contamine said the deal was at a basis of an enterprise value at 13.3 times 2009 earnings before interest, tax, depreciation and amortization, which he called in line with recent deals.
Chattem makes and sells household and personal care products such as over-the-counter drugs, cosmetics and dietary supplements. It was founded more than 100 years ago and its brands include Gold Bond, Icy Hot, Cortizone-10 and Unisom.
The transaction had been backed by Chattem's directors and was expected to be accretive to Sanofi's earnings as early as year one, the French group said.
Chattem was an ideal entry into the United States and the company would manage Sanofi's Allegra allergy drug, which is losing its status as a prescription medicine, CEO Viehbacher told a conference call.
The acquisition of Chattem will be a significant milestone in Sanofi-Aventis's transformation strategy and will provide us with the ideal platform in the U.S. consumer healthcare market, which represents 25 percent of the current worldwide opportunity, Viehbacher added in a statement.
Chattem made a third quarter net profit of $23.4 million and
maintained its 2009 financial guidance when it last reported results in October.
Sanofi had also said on Monday it was stopping developing two medicines as part of an overhaul of its research and development portfolio, saying they would not bring significant benefits.
(Writing by Sam Cage; Additional reporting by Lionel Laurent and Marcel Michelson; Editing by Rupert Winchester)
($1 = 0.6978 euro)