Ladbrokes and Gala Coral team up for online betting push

* Merged group will be biggest UK high street bookmaker

* Aims to generate cash to enlarge online operations

* Regulation and higher taxes drive deals in industry (Writes through, adds quotes, details)

By Neil Maidment

LONDON, July 24 (Reuters) - Bookmakers Ladbrokes and Gala Coral sealed an all-share merger on Friday, creating a 2.3 billion pound ($3.4 billion) betting group that will seek to build on its dominance of Britain's high streets to expand its online business.

The latest deal in the gambling sector comes only a week after online betting company 888 agreed a 900 million pound takeover of rival Bwin.party. Betting firms are responding to higher tax bills in Britain and tighter regulation of the industry by looking to bulk up.

Ladbrokes (LSE: LAD.L - news) has struggled to match larger rival William Hill (Other OTC: WIMHF - news) 's ability to manage its betting shop chain and invest in online growth. Crucial marketing and product investment has also lagged fast growing online groups like Betfair.

"This is a major strategic step for Ladbrokes," said Ladbrokes Chief Executive Jim Mullen, hired in May to revitalise the business and improve a digital performance that sparked a series of profit warnings.

"Together, we will create a leading betting and gaming business combining strong brands with an attractive multi-channel offering and an extensive national and international coverage," added Mullen, who will lead the merged company.

Ladbrokes said it would issue new shares to existing Gala Coral investors representing 48.25 percent of the enlarged group, with Ladbrokes shareholders owning the rest.

Gala Coral Group is owned by a group of private equity companies including Apollo, Anchorage and Cerberus.

The tie-up will make the new group Britain's number one retail player with around 4,000 shops -- almost half of the British market. Regulators, however, are expected to insist some shops are sold off in areas where they overlap.

The popularity of high stakes betting machines has helped to give the shops a fresh lease of life in the face of regulation and tax pressures and the merged company sees this retail business as its cash engine.

Higher revenues and cost savings estimated at a minimum of 65 million pounds a year will help fund increased spending on its online arm where mobile and tablet apps have attracted an audience of younger gamblers and sports fans.

According to industry data, Gala Coral's strongly performing online business holds 8 percent of the UK digital market, with Ladbrokes' share at 6 percent. Combined the two will rival market leaders William Hill and Bet365.

LADBROKES CUTS DIVIDEND

To help fund the deal, Ladbrokes is placing 93 million new shares, representing 10 percent of the company, or around 115 million pounds.

The new firm, which will be named Ladbrokes Coral, will operate under duel brands and have combined revenues of 2.1 billion pounds. Gala Coral CEO Carl Leaver will be executive deputy chairman.

Shares (Frankfurt: DI6.F - news) in Ladbrokes, which jumped 20 percent when talks were announced last month, slipped 2.4 percent by 1000 GMT.

In a flurry of announcements Ladbrokes also reported first half operating profit in line with expectations but said increased marketing investment would hit 2015 operating profit by 20 million pounds, pushing guidance down to 70-75 million.

To help fund the investment, which will focus on more aggressive online marketing in the UK and Australia, as well as improving its shops, Ladbrokes cut its full-year dividend of 8.9 pence per share to 3p - a move long called for by many analysts.

As part of the merger agreement Ladbrokes said it would buy out partner Playtech (LSE: PTEC.L - news) from a digital marketing services deal with cash and shares in the new group.

Playtech has also agreed to take up 22.9 percent of Ladbrokes' equity placing. It will have less than a 5 percent stake in the new company. ($1 = 0.6447 pounds) (Editing by Jane Merriman and Keith Weir)