Paddy Power and Betfair have reached an agreement in principle on the key terms of a possible merger to create Paddy Power Betfair plc. The proposed deal would create one of the world’s largest public online betting and gaming companies by revenue. In a statement, Paddy Power said: “The combination has compelling strategic logic and represents an attractive opportunity for both companies to enhance their position in online betting and gaming and to deliver synergies, customer benefits and shareholder value.”

The terms of the possible merger remain conditional on completion of due diligence. Under the deal Paddy Power shareholders would own 52% and Betfair shareholders would own 48% of the combined group. Immediately prior to completion, Paddy Power shareholders would receive a special dividend of €80m.

Breon Corcoran, CEO of Betfair, would become CEO of the new company. Andy McCue, CEO of Paddy Power would become COO, while Alex Gersh, CFO of Betfair, would become CFO of the combined group. Gary McGann, chairman of Paddy Power, would become chairman of the new board.

The two companies had combined revenues of €1.5 billion in their last financial years. According to Paddy Power, the scale and capabilities would leave the enlarged entity better placed to compete in existing and new markets. Both brands would be retained abd there would be cost and revenue synergies from efficiencies.

For the purposes of the Irish Takeover Rules, Betfair is the offeror and Paddy Power is the offeree. Paddy Power has until 5pm on 23 September 2015 to announce either a firm intention to make an offer for Betfair or announce that it does not intend to make an offer.

In Association with

Paddy Power's Andy McCue (left) with Nigel Northridge

Analyst David Jennings at Davy, Paddy Power’s house broker, said both companies have proven management teams with long track records of high returns on capital, strong compound earnings growth and substantial cash returns over time.

“The combined entity is likely to be greater than the sum of its parts,” he said. “Overall, we see substantial value creation potential from the proposed merger and, coupled with the underlying earnings upgrades for both companies implied by this morning’s results, this means that there is significant share price upside for both.

“Based on our forecasts, the combined business would have a cost base of a little over €1.5bn in 2016. Revenue synergies could work both ways with Paddy Power’s expertise benefiting gross win margins in Betfair’s sportsbook and the exchange capabilities substantially benefiting Paddy Power’s customers.”

Jennings cautioned that previous mergers between online gaming companies have flattered to deceive, albeit regulatory and tax issues have usually been big sources of difficulties. “This is less likely in this case given the sustainable nature of both business models,” said Jennings. “Both groups have very distinctive brand values and corporate identities that may clash. However, given management’s background and significant changes made at Betfair in recent years, this will likely be less of a problem than perhaps once would have been the case.”

Breon Corcoran was a former senior executive at Paddy Power who jumped ship to Betfair after being passed over for the CEO role.