Betfair
Betfair and Paddy Power are set to join forces after coming to an agreement in principleBetfair

Gambling giants Betfair and Paddy Power have reached an agreement in principle on a £5bn merger that would pave the way for one of the world's largest online betting and gaming companies.

The move is the latest in a wave of takeovers in the betting industry and follows the £2.3bn merger between Ladbrokes and Coral last month.

The combined group will have annual revenue of £1.1bn with Dublin-based Paddy Power's shareholders holding a 52% stake and receiving an €80m (£58.5m) special dividend. London-based Betfair's shareholders will own the remaining 48%.

"Discussions remain ongoing regarding the other terms of the possible merger," a statement read today (26 August).

Speaking to Reuters in a telephone interview, Paddy Power CFO, Cormac McCarthy said: "We think this is a very attractive opportunity, the scale and capability is unsurpassed and would leave us in a much better place to compete in our current markets where competition is intense.

"We are enthused by this, we think it's very attractive but at the moment it's just a possibility and there's a lot to be done in the coming weeks and months." He also said the deal will give the combined company a "market leading position" in the UK, Ireland, Australia and the US.

Betfair's Breon Corcoran will lead the new group and current Paddy Power chairman, Gary McCann will retain his position. Consolidation in the gambling sector is being viewed as a coping mechanism in response to the pressure that it is under.

"Tighter overheads is one key factor behind the M&A drive, but increasing regulation is too," Jonathan Buxton, Partner and Head of Consumer at Cavendish Corporate Finance said in an e-mailed statement. "Despite the gambling industry contributing over £2bn annually to UK GDP, it has never been viewed very favourably by Parliament and regulatory bodies have been keen to clamp down, partly because many big bookmakers have located themselves offshore to reduce their tax burden.

"Securing economies of scale and cost savings through consolidation is one way the industry is trying to cope with the significant pressures it is under. Odds are high that the formation of 'Betty Power' won't be the last sizeable deal in the sector," he said.

In an uncanny and prescient move last month, Paddy Power posted a tweet following the Ladbrokes/Coral merger, joking that they had joined forces with Betfair. Shares in both Paddy Power and Betfair soared on news of the merger.