PartyGaming and 888 in tie-up talks

PartyGaming and 888 Holdings are in the middle of talks to create a £1.6bn internet gaming company in the aftermath of the ban on online gambling in the United States.

The move comes as no surprise as both operators are scrambling to rebuild their businesses after their forced withdrawal from America, until now the world's most lucrative gaming market.

Shares in the mainly London-listed sector collapsed, and PartyGaming dropped out of the FTSE 100 while 888 fell out of the FTSE 250 index.

Executives of the two companies have held preliminary talks exploring a possible tie-up in the past couple of weeks, and further discussions are planned in coming weeks when Mitch Garber, PartyGaming's chief executive who is on holiday this week, returns. Sources close to the companies stressed the talks were informal and at a very early stage.

Insiders say a combination of the two companies makes perfect sense as their businesses would complement each other.

PartyGaming is the world's largest online poker company while 888 is the biggest internet casino operator. The two already share an office building in Gibraltar, where they both have their headquarters.

With a market value of £1.2bn, PartyGaming dwarfs 888, which is worth £364m, and any tie-up is expected to take the form of a takeover. A deal is expected to take weeks to hammer out, rather than months, as internet companies can be put together relatively easily.

Should the takeover go through, the new company would probably be led by Mr Garber. 888's management team, currently led by John Anderson, is highly regarded and it is thought that Gigi Levy, who is due to take over from Mr Anderson at the end of the year, would have a senior role in the newly merged group. It is believed that PartyGaming stands to gain most from a tie-up with 888. It used to get about 85 per cent of its revenues from the US before it was forced to pull out. About 90 per cent of its revenues come from poker, which requires a large pool of players to make it interesting for those playing, but the exit from the American market means that the number of players has dropped sharply.

888 has not been hit as hard as PartyGaming as it had already cut its dependence on the US to 50 per cent of its business by expanding into 170 countries. The firm also focuses on online casino games, which are seen as more resilient, while poker makes up only about a third of revenues.

PartyGaming and 888 both declined to comment.

Mr Garber set out an acquisitive new strategy 10 days ago when he unveiled third-quarter figures. He said the group would push "aggressively" into new territory, including Asia, and was in discussions with several firms. "I believe this is a golden consolidation opportunity for PartyGaming. We are the online gaming company with the most firepower," he said.

With large chunks of their businesses wiped out overnight by the new US ban, all internet gaming firms are looking at ways of shoring up their sales and replacing the lost pool of American players. One of the problems they face is that they have lost their most active punters - Americans bet far more often and bigger amounts than Europeans.

Executives are on the lookout for takeover targets particularly in Europe and Asia as they build new businesses there, such as Sportingbet, whose former chairman, Peter Dicks, was arrested in the US last month but has since been released. Sportingbet has taken a £210m exceptional hit from the closure of its US operations while PartyGaming faces a $250m charge.