The mooted merger between Premier Inn and Travelodge to create a budget hotel behemoth is “50 to 60 per cent likely to happen”, according to sources close to the talks.

Whitbread, which owns Premier Inn, Britain's biggest hotel chain with more than 500 properties, is in early-stage talks to acquire its rival from Dubai International Capital (DIC) in a cash-and-shares deal worth an estimated £600 million to £700 million.

A source close to the process said: “It has got beyond a conversation, and there is a willingness to progress, but none of the important issues have been agreed yet. For example, how do you value the site pipeline?”

The proposed transaction has not been universally welcomed by Whitbread's shareholders. One leading institutional investor is calling for an urgent meeting with managemement to discuss both the strategic and financial rationale for such a move.

The institution, which asked not to be named, said that the sharp decline in the Whitbread share price in recent months meant there was a risk it would pay a much higher multiple for Travelodge than the multiple for Premier Inn implied by the current Whitbread share price.

It said it would like to see Whitbread either spin off its Costa coffee chain or auction its own lodge business, citing Accor, Starwood Hotels & Resorts, InterContinental Hotels Group and DIC itself as possible bidders.

Neither Whitbread nor DIC, which is being advised by Goldman Sachs, would comment. A source close to Whitbread dismissed the suggestion that the company would overpay, insisting: “There's no way we'd pay last year's price for this year's acquisition.”

Travelodge, which has 330 hotels and 44 more in the pipeline, yesterday reported a 30 per cent jump in underlying earnings to £55.8 million in 2007, from revenues 20 per cent higher at £243.8 million. The company, once part of the old Forte hospitality empire, has three hotels in Spain, and recently announced a €1 billion programme to open 100 more Travelodges across the country by 2020.

Analysts said that a sale to Whitbread was probably the only prospect for an exit for DIC given the debt market crisis, as few private equity rivals would be able to fund a deal. One said: “Whitbread can afford to pay a bit more because of the synergies. Even if DIC takes a big chunk of shares, it will acquire them cheaply with the ability to sell out when markets improve.”

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