The total price of the deal is said to be $2.5bn. The offer from KKR was worth $1.25bn.
The government agency is the Innovation Network Corporation of Japan which will invest $1.86bn in Renesas in return for two thirds of Renesas' shares. The INCJ says it will shake up the managment and appoint a new president from outside the company.
INCJ says it will also sell off Renesas' LSI business.and integrate it with businesses at Fujitsu and Panasonic.
About ten industrial companies will invest another $610m. Among the ten are Toyota, Nissan, Nikon, Yasakawa Electric, Keihin, Panasonic and Denso. Canon and Honda may join in. Also Bosch of Germany may buy a stake.
It is thought that the industrial investors were concerned about security of supply of Renesas's microcontrollers if KKR's bid succeeded and KKR then imposed radical re-structuring.
Renesas has forecast a loss of $1.8bn for the current fiscal year and has wracked up cumulative losses of around $6bn in the last seven years.
The company has instigated a 7,500 early retirement plan for its workforce which should save about $630m in annual costs. Renesas has 42,700 employees and revenues of $10bn.
Renesas has recently negotiated a $2bn loan from Japanese banks and received a $1.24bn injection of cash from major shareholders Hitachi, NEC and Mitsubishi plus some banks.