European Leisure and Allied Leisure are in discussions "which may or may not lead to a merger", according to a joint statement.
The brief statement said any merger would be on a share for share basis "on appropriate terms".
Neither company has been prepared to elaborate. However, the talks are seen as a move towards rationalisation of the fragmented British leisure industry.
European Leisure last October purchased an 18.5 per cent stake in another leisure firm, Waterfall holdings, a publicly-quoted rival snooker club in Britain.
This was seen as a prelude to a takeover bid but industry sources say Waterfall might be incorporated in a three-way merger. No one was available from Waterfall for comment.
Some of the institutional shareholders in Allied and European Leisure are understood to have put pressure on the companies to merge their interests. However, the discussions are said to be friendly. Both companies are of a similar size, but Allied is a little larger than European Leisure which is capitalised at about £25 million sterling (€36.7 million). Allied generates sales of some £48.6 million while European generates £65.5 million.
Allied's results showed a pre-tax profit of £4.4 million while European Leisure recorded a drop from £7.0 million to £0.57 million due to exceptional write offs.
Allied operates 56 family entertainment centres and fast food restaurants; ten-pin Megabowl outlets and a Burger King franchise network.
Following the sale of its amusement machine manufacturer, Maygay Machines, European Leisure has been left with 70 American pool and snooker clubs across Britain.
