Paddy Power Betfair merging U.S business with FanDuel

* PPB to pay $158 mln in cash, contribute $612 mln in assets

* Irish firm can take 100 pct ownership after 5 years

* Deal follows U.S. Supreme Court ruling to open U.S. market (Adds details, FanDuel quotes)

By Padraic Halpin

DUBLIN, May 23 (Reuters) - Paddy Power Betfair (Other OTC: PDYPF - news) has agreed to merge its U.S. business with fantasy sports company FanDuel to target the U.S. sports betting market that is set to open up in the coming years, the Irish bookmaker said on Wednesday.

Under the agreement, Paddy Power Betfair will contribute its existing U.S. assets worth $612 million along with $158 million of cash to take a 61 percent stake in the combined business, with existing FanDuel investors owning 39 percent.

The Dublin-based company can increase its ownership to 80 percent after three years and 100 percent after 5 years via call and put options at the prevailing market valuations, it added.

"This combination creates the industry's largest online business in the U.S., with a large sports-focused customer base and an extensive nationwide footprint," Paddy Power Betfair Chief Executive Peter Jackson said in a statement.

"Together with our substantial financial firepower, we believe we are now well placed to target the prospective U.S. sports betting opportunity."

Firms like Paddy Power (EUREX: 27913021.EX - news) are looking for growth opportunities to offset the increasing cost of regulation in established markets such as Australia and Britain, where a crackdown on high street operators was launched last week.

The transaction follows a U.S. Supreme Court ruling last week that paved the way for states to legalise sports betting after it struck down a 1992 federal law that had barred gambling in most places.

Paddy Power Betfair will have operational control of the combined business, which will become a fully consolidated subsidiary. The deal is expected to close in the third quarter of the year, it said.

This cash contribution will be used to pay down FanDuel's existing debt of $76 million and fund working capital of the combined business.

FanDuel has 7 million registered customers across 40 states and over 40 percent of the the daily format of the U.S. fantasy sports market, which has exploded online in recent years and enabled participants to spend money on contests more frequently.

However fantasy sports companies have faced scrutiny from officials who questioned whether paid daily games amounted to gambling. FanDuel's proposed merger with rival DraftKings fell foul of regulators last year.

It was valued at more than $1 billion before the crackdown began.

Paddy Power Betfair, whose shares rose sharply last week when it disclosed it was in talks with FanDuel, said the U.S. firm had revenues of $124 million last year and that the combined business's earnings would currently be operating at broadly breakeven, before investment in sports betting.

"We are excited to bring these two great businesses together," FanDuel Chief Executive Matt King said. (Reporting by Padraic Halpin; Editing by Adrian Croft)