Online gambling company Betfair and Irish rival Paddy Power said yesterday they had reached an agreement in principle on a £5 billion merger, marking the latest in a string of deals in the sector.

The two firms said discussions were ongoing regarding some terms of the all-share merger that would create one of the world’s largest online betting and gaming groups with revenues of over £1.1 billion.

“We think this is a very attractive opportunity, the scale and capability are unsurpassed and would leave us in a much better place to compete in our current markets where competition is intense,” Paddy Power chief financial officer Cormac McCarthy told Reuters in a telephone interview.

Under the terms, Paddy Power shareholders would own 52 per cent of the group with Betfair shareholders owning the rest. Immediately prior to completion – expected by December or January because of regulatory issues – Paddy Power shareholders would receive a special dividend of €80 million, the firms said.

The tie-up would be the latest in a flurry of M&A deals in a sector where companies are responding to higher tax bills in Britain and tighter regulation by seeking to bulk up and better compete in the fast-growing online market.

During FY2014 Betfair obtained a gaming licence in the UK and began paying Point of Consumption tax following its introduction in December 2014 – £19.2 million in financial year ended April 30, 2015 and £12.8 million in the first quarter.

“Although timing remains uncertain, we expect a new gaming tax regime for Ireland to be in place by August 2015 and are seeking to obtain a licence. If both taxes had been in place for the whole of FY15, we estimate that the cost would have been approximately £47 million,” Betfair chief executive Breon Corcoran said in the annual report.

Paddy Power is the larger of the two firms with a market capitalisation of €3.46 billion, versus £2.43 billion for Betfair, which has seen its shares rise by 140 per cent in a year on the back of strong revenue growth.

Betfair was founded in 1999 and holds gambling licences in the UK, Gibraltar, Malta, Spain, Italy, the United States, Australia, Bulgaria and Denmark. It has more than 1.7 million active customers and reported revenues of £476.5 million for the financial year ended April 30, 2015, and profit before tax of £101.2 million.

The chairman of the Malta Gaming Authority Joseph Cuschieri was not surprised by the development but said that it was too early to ascertain the impact on Betfair’s sizeable operations: “We have been seeing this consolidation trend in the industry for quite some time now. This has been happening at the ‘big player’ level mainly to increase scale and scope.

“It is of course a very interesting development to see two large gaming players like Betfair and Paddy Power engaging in merger talks. However, it is too early to say how this will affect Betfair's status in Malta because it depends on their eventual post-consolidation strategy. At this stage we are monitoring developments but cannot comment any further.”

(Additional reporting by Reuters)

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