British bookie William Hill spurns $4.1 bln Rank-888 bid

* Bookmaker rejects 364 pence-a-share-approach

* Says 16 pct premium undervalues group

* Shares (Berlin: DI6.BE - news) were higher than bid level in March

* William Hill (Other OTC: WIMHF - news) closes up 0.49 pct, 888 and Rank down (Adds closing share prices, details on Betfair)

By Paul Sandle and Rahul B

Aug 9 (Reuters) - William Hill rejected a 3.16 billion pound ($4.11 billion) bid by smaller rivals Rank Group and 888 Holdings on Tuesday, saying a 16 percent premium "substantially undervalued" the British bookmaker.

The proposed three-way deal envisages online group 888 buying Rank for shares and then William Hill for 199 pence in cash and 0.725 shares, valuing it at 364 pence a share.

However, shares in William Hill, which reported a 16 percent drop in first-half operating profit last week, closed up only 0.49 percent at 329 pence while 888 fell 1.9 percent to 219.25 pence and Rank was down 0.94 percent at 211 pence.

William Hill is set to lose its leading market position to a merger of Ladbrokes (LSE: LAD.L - news) and Coral and has failed to keep pace with rivals in fast-growing online gambling.

Gambling faces higher taxes and tighter regulation, and a series of mergers has intensified competition as firms market themselves to younger sports fans betting via mobile apps.

William Hill said its board had "unanimously rejected the proposal as it substantially undervalued William Hill".

Analyst Gavin Kelleher at broker Goodbody said the bidding consortium's bid was not pitched at a huge premium, and there was little detail about the structure, including any synergies.

"The ball is now back in 888-Rank's court," he said.

Rank and 888 have a combined market value of just 1.64 billion pounds, against William Hill's 2.85 billion pounds market capitalisation.

TABLES TURNED

Former CEO James Henderson, a 30-year company insider, made one of the first moves in the consolidation of the industry in 2015 when the company made a 720 million pound bid for 888.

However, the proposal quickly collapsed in a dispute over price with major 888 shareholder.

A subsequent wave of M&A has cut the options on the table, including Betfair, which was seen as a good fit for William Hill, but was lost to a merger with Paddy Power (EUREX: 27913021.EX - news) .

Since then, William Hill has issued two profit warnings in the last six months and fired Henderson in July after its board said he was failing to deliver enough growth in its online and international businesses.

High street shops where gamblers bet on horse or greyhound racing have been a feature of British towns since the 1960s.

But betting "in play" on televised soccer matches has attracted a younger generation of tech-savvy sports fans as the gambling scene has moved online.

Although William Hill grasped these trends before rivals it has lost momentum and its stock tumbled from 415 pence in March to 235 pence in June, a month before Henderson was dismissed. ($1 = 0.7693 pounds) (Editing by Adrian Croft and Alexander Smith)