* 888 takeover talks could be revived
* International growth offers alternative route to expansion
By Neil Maidment
LONDON, Sept 15 (Reuters) - William Hill began the year as Britain's biggest bookmaker, with an online and retail business that rivals struggled to match. A series of summer mergers is pushing it down the pecking order and putting it under pressure to react.
Driven by tighter regulation and tax pressures in Britain and continental Europe that are taking chunks out of profits, big betting names Ladbrokes (LSE: LAD.L - news) and Gala Coral are combining, as are Paddy Power (LSE: PAP.L - news) and Betfair.
Online gambling firm GVC also agreed a 1.1 billion pound deal for larger rival Bwin.Party this month -- with the same factors fuelling consolidation.
The larger companies can divert savings into higher marketing spend and potentially offer a wider array of improved products to gamblers on smart phones and tablets. Smaller rivals are then squeezed out and these new groups' lower costs, enhanced market share and larger revenues all help to soften bigger tax charges.
High street shops where gamblers can bet on horse or greyhound racing have been a feature of British towns since the 1960s. Betting "in play" on televised soccer matches has also attracted a younger generation of tech-savvy sports fans as the gambling scene has moved online.
William Hill grasped these trends before rivals but now appears to have ground to make up.
"William Hill could benefit from a potential partnering up with another operator, now it has more credible competition coming. But it's hard to see exactly who," HSBC analysts said.
888 IN PLAY?
Led by CEO James Henderson, a 30-year company insider who replaced veteran Ralph Topping last year, it was William Hill who made one of the first moves of 2015, tabling a 720 million pound bid for online gambling firm 888.
The deal, though, quickly collapsed over a dispute on price with major 888 shareholder, Israel's Avi Shaked.
The M&A wave since has heavily cut the options on the table, including the removal of Betfair, which analysts had tipped as a great fit.
Having lost out to GVC in the battle for Bwin, 888 remains the obvious choice. The firm has a market capitalisation five times smaller than William Hill's 3 billion pound tag and would add leading technology, strong casino and bingo positions and a lot of cost synergies to its arsenal, analysts say.
The only other big player, privately owned online firm Bet365, is likely too expensive and has an exposure to unregulated markets William Hill wants to avoid.
Media reports suggest William Hill remains interested in 888, although shareholder hurdles remain. Shaked would rather expand 888 than cash in, according to a source close to his company.
William Hill is set to cede leadership of the British market to its merged rivals.
With nearly half the betting shops on the high street, Ladbrokes Gala Coral will replace it as Britain's biggest bookmaker. In the faster growing online sector it will slip to third, behind both Paddy Power Betfair and Ladbrokes Gala Coral, according to industry data.
CEO Henderson wants to increase international revenues by 50 percent by 2018, diversifying from a British market currently worth 82 percent of its 1.6 billion pound turnover.
Peel Hunt analyst Nick Batram said he expected the company to return to 888 for talks but that its focus could turn to smaller deals in the U.S., Latin America and Scandinavia.
"Gaming is a global market and I would expect them to be looking globally at where they might go," Batram said.
An example of William Hill's appetite for diversification is August's $25m purchase of a minority stake in U.S. based online lottery firm NeoGames, which operates in a $60 billion industry.
"ONE TO FEAR"
However, in the near term it is pressure closer to home that the company will need to try to ride out.
William Hill will not surpass 2014 pretax profit of 317 million pounds until 2018, according to Reuters data, hit by a new tax on online bets made in Britain, and new rules crimping retail income.
Rising competition now poses an extra challenge and shares in the firm have fallen 14 percent in three months.
HSBC analysts have called a Betfair Paddy Power combination "one to fear" in the UK and Europe, as it benefits from an ability to apply marketing and technology to a larger customer base online, cross-sell Betfair's betting exchange product into Paddy Power's strong retail arm, and uncover big savings.
Elsewhere Ladbrokes -- long an underperformer online -- will immediately gain ground thanks to Coral's better performing business, while marketing spend that has long trailed that of rivals will match William Hill's budget by next year.
"There's a clear risk that it (William Hill) is pushed down the rankings of customer awareness as it is faced by larger competitors," HSBC analysts said, though the company insists it has sufficient marketing firepower to compete.
Despite the deluge of deals the firm also has no size complex either, according to HSBC analysts: "Ultimately, we see it pressing on alone, perhaps buying more foreign assets and developing its own technology internally," they said. ($1 = 0.6479 pounds) (Editing by Keith Weir)