Sir Richard Branson has sold his Virgin Megastores chain to Zavvi Entertainment Group, a management buyout vehicle.

The terms of the deal were not disclosed, but industry insiders said that Sir Richard was likely to have offered the management team a significant dowry, possibly more than £20 million, to take the loss-making chain off his hands.

The management team, led by Simon Douglas, Virgin Megastores’ managing director, and Steve Peck-ham, its finance director, will continue to operate its more than 130 stores in the UK and Ireland. The British stores will be rebranded as Zavvi by November. Its recently revamped online store and Irish outlets will continue to trade as Virgin until January, when they will switch to the Zavvi brand.

Mr Douglas, who oversaw a £100 million investment in the Virgin stores over the past three years for Sir Richard, would not comment on the financial backing for his buyout. He said: “There is an opportunity to establish a new and exciting entertainment brand.”

Sir Richard has been keen to off-load the chain, which made a pretax loss of £82.2 million in the year to March 2006. The company would not disclose the level of losses in the year to March 2007, but industry observers believe that the cash losses are likely to have been as much as £50 million.

One observer said: “Simon Douglas has done a lot to improve the business, but in these industry conditions it would be very difficult for him.”

In the past year, Virgin’s rivals Fopp and Music Zone have both called in the administrators, while HMV, the market leader, has issued a number of profit warnings. Last month Choices UK, the DVD rental company, also went bust after failing to find a buyer.

Virgin is understood to have held talks with both Fopp and HMV regarding a merger in the past year as the market for CDs and DVDs has become increasingly difficult.

Despite a gloomy outlook for the entertainment sector, Mr Douglas said: “We believe Zavvi is well-placed to thrive in the challenging market place.”

He said that four new stores were planned in Ireland as well as new sites in Liverpool, Belfast and Bristol over the next year.

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