Shares in British bookmaker Ladbrokes closed almost 15% higher today on news of its merger talks with Gala Coral.
The proposed merger designed to create a $5 billion giant with the firepower to get ahead in the key online gambling market.
The talks are the first major move by Ladbrokes chief executive Jim Mullen, who was appointed in March with a remit to grow digital services at Britain's second biggest bookmaker and close the gap on market leader William Hill.
The two businesses would have around 4,000 betting shops, almost half the UK market.
This means that Britain's competition authority would be likely to insist some shops are sold off in areas where they overlap.
If the talks are successful, the combined company could use cash generated by its high street business to spend more promoting online services, an area where Ladbrokes has traditionally been weak.
Demand for online gambling is rapidly increasing on the back of mobile and tablet apps.
Gala Coral's strongly performing online business holds 8% of a UK digital market led by Bet365, according to industry research group H2GC. Combined with Ladbrokes' 6%, the two businesses would rival William Hill.
The talks come as consolidation hots up across the bookmakers industry, with fast-growing online players searching for scale and more traditional bookmakers looking for ways to bolster services and cushion the impact of tighter regulation and higher UK taxes.
In February, William Hill failed in a bid to buy online gambling company 888, which itself has said it is on the hunt for acquisitions.
Online rival Bwin.Party is up for sale and expects to reach a conclusion on takeover offers soon.
In its statement, Ladbrokes said the talks were to combine the entities of Ladbrokes and Coral Retail, Italian online business Eurobet Retail and Gala Coral's online businesses.
"A merger with Gala Coral could create a combined business with significant scale and has the potential to generate substantial cost synergies, creating value for both companies' shareholders," Mullen said in a statement.
Analysts said corporate costs could be reduced by £33m a year in total, with management and staff reductions and other synergies potentially reducing combined operational costs of over £1.7 billion by 5% a year.
Mullen said that the Ladbrokes board has yet to decide if the deal was "strategically attractive".
If the discussions advance, Ladbrokes may undertake an equity placing to strengthen the balance sheet of the combined company, it said.
Ladbrokes said the proposed combination, if completed, may be classified as a reverse takeover of Ladbrokes.
Gala Coral Group employs over 15,000 people and is owned by a group of private equity companies including Apollo, Anchorage and Cerberus.
Meanwhile, Ladbrokes Ireland was put into examinership in April after an application to the High Court. Ladbrokes has 196 shops in the Republic of Ireland and it employs 840 people here.
It said the decision followed several years of declining profits, which resulted in a loss after interest and tax of over €5m in the last financial year.
The company cautioned that the restructuring is likely to lead to redundancies at all levels of its business here.
Ladbrokes tried to buy Coral in 1998, but had to give up after the then British trade and industry minister, Peter Mandelson, stopped the transaction, saying the deal would damage competition and disadvantage gamblers.
