Ladbrokes shares leap on $5 billion Gala Coral merger talks

* Two firms in early merger talks

* Could create leading business with a near $5 bln value

* Ladbrokes (LSE: LAD.L - news) shares up 20 percent

* Deal designed to boost online presence (Adds reaction)

By Kate Holton and Neil Maidment

June 23 (Reuters) - Shares (Berlin: DI6.BE - news) in British bookmaker Ladbrokes jumped 20 percent on Tuesday on news of its merger talks with Gala Coral, designed to create a $5 billion giant with the firepower to get ahead in the key online gambling market.

The talks are the first major move by Ladbrokes Chief Executive Jim Mullen, who was appointed in March with a remit to grow digital services at Britain's second biggest bookmaker and close the gap on market leader William Hill (Other OTC: WIMHY - news) .

The two businesses would have around 4,000 betting shops, almost half the UK market, meaning Britain's competition authority would be likely to insist some shops are sold off in areas where they overlap.

If the talks are successful, the combined company could use cash generated by its high street business to spend more promoting online services, an area where Ladbrokes has traditionally been weak. Demand for online gambling is rapidly increasing on the back of mobile and tablet apps.

Gala Coral's strongly performing online business holds 8 percent of a UK digital market led by Bet365, according to industry research group H2GC. Combined with Ladbrokes' 6 percent the two businesses would rival William Hill.

"This potential combination we think would make strategic sense," Bank of America Merrill Lynch analyst Simon Larkin said.

"It would create significant scale, offer 'substantial cost synergies' and, potentially have positive implications for the ability to successfully turn around Ladbrokes' online operations."

The talks come as consolidation hots up across the industry, with fast-growing online players searching for scale and more traditional bookmakers looking for ways to bolster services and cushion the impact of tighter regulation and higher UK taxes.

In February, William Hill failed in a bid to buy online gambling company 888, which itself has said it is on the hunt for acquisitions. Online rival Bwin.Party is up for sale and expects to reach a conclusion on takeover offers soon.

In its statement, Ladbrokes said the talks were to combine the entities of Ladbrokes and Coral Retail, Italian online business Eurobet Retail and Gala Coral's online businesses.

"A merger with Gala Coral could create a combined business with significant scale and has the potential to generate substantial cost synergies, creating value for both companies' shareholders," Mullen said in a statement.

Exane Paribas analysts said corporate costs could be reduced by 33 million pounds a year in total, with management and staff reductions and other synergies potentially reducing combined operational costs of over 1.7 billion pounds by 5 percent a year.

Mullen said that the Ladbrokes board has yet to decide if the deal was "strategically attractive". If the discussions advance, Ladbrokes may undertake an equity placing to strengthen the balance sheet of the combined company, it said.

Shares in Ladbrokes traded 20 percent higher at 147p by 1149 GMT. Ladbrokes said the proposed combination, if completed, may be classified as a reverse takeover of Ladbrokes.

Gala Coral Group employs over 15,000 people and is owned by a group of private equity companies including Apollo, Anchorage and Cerberus.

($1 = 0.6330 pounds) (Additional reporting by Ankush Sharma and Aastha Agnihotri in Bengaluru and Li-mei Hoang in London; Editing by Keith Weir and Catherine Evans)