Prada has agreed to buy its smaller rival Versace in a billion dollar deal to unite two of the biggest designer fashion labels.

The deal to unite the two Italian brands has an estimated value of $1.36bn (£1.06bn), the Prada Group said on Thursday.

"We aim to continue Versace's legacy celebrating and re-interpreting its bold and timeless aesthetic," said Prada chairman Patrizio Bertelli.

The Prada Group already owns several other designer labels including Miu Miu and luxury footwear brand Church's.

Its acquisition of Versace will create a multi-billion dollar luxury fashion group, putting the brands in a position to compete with the likes of French luxury fashion conglomerates LVMH and Kering.

Negotiations to buy Versace between Prada and Capri began in February.

The price Prada agreed to pay for Versace is significantly lower than the $2.15bn that Capri Holdings spent when it bought Versace in 2018.

The deal, which includes the brand's debt pile, comes as Versace has been operating at a loss amid a slowdown in demand for luxury fashion worldwide.

Capri also owns other fashions brands including Jimmy Choo and Michael Kors.

Mr Bertelli said that the Prada Group would provide Versace with "a strong platform".

"Versace has huge potential. The journey will be long and will require disciplined execution and patience," added Andrea Guerra, the chief executive of Prada.

In March, Donatella Versace stepped down from her creative director role at the luxury brand after nearly 30 years.

She had held the position since 1997 and took over after the murder of her brother Gianni.

The 69-year-old has a new role as the chief brand ambassador for Versace, while Dario Vitale, who is a former design and image director of Miu Miu, took over as chief creative officer.