Budding luxury conglomerates, including Michael Kors' U.S. rival Tapestry, owner of Coach and Kate Spade, are trying to make in-roads into an industry still dominated by European players such as Louis Vuitton owner LVMH.
Michael Kors, whose namesake label is best known for its leather handbags, has made no secret of its ambition to grow its portfolio of high-end brands after buying British stiletto-heel maker Jimmy Choo for $1.2 billion last year.
Versace, known for its bold and glamorous designs and its Medusa head logo, is one of a clutch of family-owned Italian brands cited as attractive targets at a time when the luxury industry is riding high on strong demand from China.
But not all brands have benefited equally, with some struggling to refresh their image or products to capture a younger audience, and some fashion groups are looking to diversify with more labels to face such challenges.
"Bringing brands like these back to centre stage is not as easy as it looks, though," said Luca Solca, an analyst at Exane BNP Paribas. "Would Michael Kors have what it takes to succeed in this? I wonder. The plan seems ambitious."
Shares in Michael Kors fell in early U.S. trade and were down 8.7 percent by 1526 GMT.
The move is in line with the U.S. brand's ambition to aggregate various luxury brands - including fashion, shoes and accessories - under one larger group.
The deal - which is expected to be announced imminently - will give Michael Kors a mega-brand and red carpet favourite that is among the most recognisable and followed fashion labels in the world.
Two of the three sources who spoke to Reuters said the company had agreed to pay a large premium for Versace.
Michael Kors could not be reached for comment. Versace declined to comment.
Donatella Versace, sister of late founder Gianni who doubles as artistic director and vice-president of the Milan-based group, has called a staff meeting for Tuesday, according to a person who was briefed by a company employee.
The Italian fashion icon has been considering a market listing after U.S. private equity group Blackstone bought a 20 percent stake in 2014 to fund overseas expansion, although Chief Executive Jonathan Akeroyd told Reuters earlier this year there was no rush for an IPO.
After investing in Versace at a high multiple, Blackstone found its performance insufficient to justify a market listing, said one of the sources, who is close to the family.
"They gradually persuaded the family to look into a possible sale and introduced them to a series of buyers, including Michael Kors," the person added.
"Blackstone wasn't going to put any more money into it. They needed a buyer who could make heavy investments."
French fashion houses including Paris-based Kering were among those holding talks with the Versace family, the sources said, but considered the price too expensive.
"They didn't feel the need to invest so much money into another Italian fashion brand. It was overpriced," the source said.
Kering declined to comment.
As part of the deal, Blackstone will fully exit Versace, while the family, which owns the rest of the fashion house via a holding company called Givi, will keep a role, the sources said.
Givi in turn is half-owned by Allegra Versace Beck, daughter of Donatella and niece of late founder Gianni. Donatella herself owns 30 percent of the holding, with the remainder in the hands of her brother Santo.
Blackstone, whose stake acquisition valued Versace at $1.4 billion in 2014, declined to comment.
Versace does not disclose its financial details, but documents deposited with the Italian chamber of commerce show that last year it posted sales of 668 million euros ($786 million) and earnings before interest, tax, depreciation and appreciation (EBITDA) of 44.6 million euros.
Since Akeroyd's appointment in 2016, Versace has been working on streamlining its management structure, cutting costs and pushing to increase sales online.
Last year it returned to a net profit of just under 15 million euros compared with a net loss of 7.9 million euros the previous year.
($1 = 0.8499 euros)
(Additional reporting by Claudia Cristoferi, Giulia Segreti and Elisa Anzolin in Milan and Sarah White in Paris, writing by Agnieszka Flak; editing by Louise Heavens, Kirsten Donovan and Alexander Smith)
By Pamela Barbaglia