* Merged group will be biggest UK high street bookmaker
* Aims to generate cash to enlarge online operations
* Regulation and higher taxes drive deals in industry (Writes through, adds quotes, details)
By Neil Maidment
LONDON, July 24 (Reuters) - Bookmakers Ladbrokes andGala Coral sealed an all-share merger on Friday, creating a 2.3billion pound ($3.4 billion) betting group that will seek tobuild on its dominance of Britain's high streets to expand itsonline business.
The latest deal in the gambling sector comes only a weekafter online betting company 888 agreed a 900 millionpound takeover of rival Bwin.party. Betting firms areresponding to higher tax bills in Britain and tighter regulationof the industry by looking to bulk up.
Ladbrokes has struggled to match larger rival William Hill's ability to manage its betting shop chain and invest inonline growth. Crucial marketing and product investment has alsolagged fast growing online groups like Betfair.
"This is a major strategic step for Ladbrokes," saidLadbrokes Chief Executive Jim Mullen, hired in May to revitalisethe business and improve a digital performance that sparked aseries of profit warnings.
"Together, we will create a leading betting and gamingbusiness combining strong brands with an attractivemulti-channel offering and an extensive national andinternational coverage," added Mullen, who will lead the mergedcompany.
Ladbrokes said it would issue new shares to existing GalaCoral investors representing 48.25 percent of the enlargedgroup, with Ladbrokes shareholders owning the rest.
Gala Coral Group is owned by a group of private equitycompanies including Apollo, Anchorage and Cerberus.
The tie-up will make the new group Britain's number oneretail player with around 4,000 shops -- almost half of theBritish market. Regulators, however, are expected to insist someshops are sold off in areas where they overlap.
The popularity of high stakes betting machines has helped togive the shops a fresh lease of life in the face of regulationand tax pressures and the merged company sees this retailbusiness as its cash engine.
Higher revenues and cost savings estimated at a minimum of65 million pounds a year will help fund increased spending onits online arm where mobile and tablet apps have attracted anaudience of younger gamblers and sports fans.
According to industry data, Gala Coral's strongly performingonline business holds 8 percent of the UK digital market, withLadbrokes' share at 6 percent. Combined the two will rivalmarket leaders William Hill and Bet365.
LADBROKES CUTS DIVIDEND
To help fund the deal, Ladbrokes is placing 93 million newshares, representing 10 percent of the company, or around 115million pounds.
The new firm, which will be named Ladbrokes Coral, willoperate under duel brands and have combined revenues of 2.1billion pounds. Gala Coral CEO Carl Leaver will be executivedeputy chairman.
Shares in Ladbrokes, which jumped 20 percent when talks wereannounced last month, slipped 2.4 percent by 1000 GMT.
In a flurry of announcements Ladbrokes also reported firsthalf operating profit in line with expectations but saidincreased marketing investment would hit 2015 operating profitby 20 million pounds, pushing guidance down to 70-75 million.
To help fund the investment, which will focus on moreaggressive online marketing in the UK and Australia, as well asimproving its shops, Ladbrokes cut its full-year dividend of 8.9pence per share to 3p - a move long called for by many analysts.
As part of the merger agreement Ladbrokes said it would buyout partner Playtech from a digital marketing servicesdeal with cash and shares in the new group.
Playtech has also agreed to take up 22.9 percent ofLadbrokes' equity placing. It will have less than a 5 percentstake in the new company. ($1 = 0.6447 pounds) (Editing by Jane Merriman and Keith Weir)
