Whitbread, the leisure group, is in talks to create the dominant force in the British budget hotel market by merging its Premier Inn chain with the rival hotel company Travelodge.

It is understood that talks between the two are at an early stage, although both sides are believed to agree on the merits of a deal. “The commercial logic is compelling,” a source said.

Under the terms of any tie-up, Whitbread, the owner of Costa Coffee, would acquire Travelodge, which is owned by Dubai International Capital (DIC), the private equity group owned by the Arab Emirate's ruling sheikh. It is thought that the combined group could be worth as much as £3 billion.

DIC bought Travelodge from Permira, the British buyout firm, at the end of 2006 for £675 million, beating several rivals, including Whitbread. It is believed that DIC would retain a stake in the enlarged group, probably by Whitbread paying in a mix of cash and shares.

The budget hotel market is booming. Recent studies suggest that the sector is set to treble by 2027, growing up to ten times faster than the rest of the hotel industry. Premier Inn is already the UK's largest hotel chain and is Whitbread's biggest and best-performing business since the group has moved out of its brewing, Marriot UK hotels and David Lloyd Leisure operations, which it has done gradually since 1999.

Premier was formed by Whitbread's acquisition of Premier Lodge from Scottish & Newcastle in 2004. It was merged with Whitbread's Travel Inn brand to form Premier Travel Inn. However, because the name was so close to Travelodge, Whitbread re-branded the chain Premier Inn last October. It has about 32,500 bedrooms in the UK, compared with 22,000 for Travelodge. In its most recent interim statement, Alan Parker, Whitbread's chief executive , said that Premier's like-for-like sales for the 50 weeks that ended on February 14 were up 10.5 per cent, while total sales rose 15.1 per cent. A new savings plans should cut Whitbread's costs by about £25 million a year in 2009-10, he said at the time.

It is not clear who would run a joint business. Mr Parker is due to retire in 2010, but if DIC retains a stake in the business it could favour Grant Hearn, Travelodge's chief executive. Mr Hearn ran Whitbread's Travel Inn business before being poached by DIC to run Travelodge.

Any merger could face a competition inquiry. Although the combined group would have a small percentage of the overall British hotel market, it would have a stranglehold on the budget hotel sector. Both groups are keen on international expansion. Premier has opened its first budget hotel in Dubai and is looking at China. Travelodge aims to open 100 hotels in Spain by 2020.

Travelodge declined to comment on the merger speculation. A spokesman for Whitbread said that the company looked at lots of acquisition possibilities but had no comment to make on Travelodge.

Barceló Hotels & Resorts, which runs some of Britain’s most historic hotels, is to introduce Mediterranean touches as it begins ambitious expansion plans. The rebranding by the Spanish group will add tapas to menus and delicatessen carts selling Spanish food items. The hotels, which Barceló leases from Dawnay Shore Hotels, include the 16th-century Lygon Arms, in the Cotswolds, which was used by Charles I and Oliver Cromwell

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