The Video Island brand will be phased out, but its CEO Simon Calver will head the combined group. Lovefilm CEO Mark Livingstone will step down and work as a consultant.
The new business will account for 17% of all DVD rentals in the UK as well as have a strong presence in Sweden, Denmark and Norway, with more than 400,000 subscribers in total.
The plan is to expand across Europe and further into new video on demand and "download to own" services. The two companies believe the merger will not only allow it to exploit such opportunities, but also to be more competitive against US rivals such as Amazon, Blockbuster and potentially Netflix, which has talked about entering the UK marketplace for some time.
In the year to December 2005, sales of the combined group will be more than £25m.
Backers of the companies remain on board although the merger is still subject to shareholder approval. Video Island's investors include Benchmark Capital, Index Ventures, Cazenove Private Equity and European Venture Partners, while Arts Alliance Media is the majority investor in Lovefilm.
Following the merger, Arts Alliance Media will provide and electronic sell through services to Lovefilm International under a long-term agreement.
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