* Merged rivals to overtake UK gambling company William Hill
* 888 takeover talks could be revived
* International growth offers alternative route to expansion
By Neil Maidment
LONDON, Sept 15 (Reuters) - William Hill began theyear as Britain's biggest bookmaker, with an online and retailbusiness that rivals struggled to match. A series of summermergers is pushing it down the pecking order and putting itunder pressure to react.
Driven by tighter regulation and tax pressures in Britainand continental Europe that are taking chunks out of profits,big betting names Ladbrokes and Gala Coral arecombining, as are Paddy Power and Betfair.
Online gambling firm GVC also agreed a 1.1 billionpound deal for larger rival Bwin.Party this month --with the same factors fuelling consolidation.
The larger companies can divert savings into highermarketing spend and potentially offer a wider array of improvedproducts to gamblers on smart phones and tablets. Smaller rivalsare then squeezed out and these new groups' lower costs,enhanced market share and larger revenues all help to softenbigger tax charges.
High street shops where gamblers can bet on horse orgreyhound racing have been a feature of British towns since the1960s. Betting "in play" on televised soccer matches has alsoattracted a younger generation of tech-savvy sports fans as thegambling scene has moved online.
William Hill grasped these trends before rivals but nowappears to have ground to make up.
"William Hill could benefit from a potential partnering upwith another operator, now it has more credible competitioncoming. But it's hard to see exactly who," HSBC analysts said.
888 IN PLAY?
Led by CEO James Henderson, a 30-year company insider whoreplaced veteran Ralph Topping last year, it was William Hillwho made one of the first moves of 2015, tabling a 720 millionpound bid for online gambling firm 888.
The deal, though, quickly collapsed over a dispute on pricewith major 888 shareholder, Israel's Avi Shaked.
The M&A wave since has heavily cut the options on the table,including the removal of Betfair, which analysts had tipped as agreat fit.
Having lost out to GVC in the battle for Bwin, 888 remainsthe obvious choice. The firm has a market capitalisation fivetimes smaller than William Hill's 3 billion pound tag and wouldadd leading technology, strong casino and bingo positions and alot of cost synergies to its arsenal, analysts say.
The only other big player, privately owned online firmBet365, is likely too expensive and has an exposure tounregulated markets William Hill wants to avoid.
Media reports suggest William Hill remains interested in888, although shareholder hurdles remain. Shaked would ratherexpand 888 than cash in, according to a source close to hiscompany.
OVERSEAS ROUTE?
William Hill is set to cede leadership of the British marketto its merged rivals.
With nearly half the betting shops on the high street,Ladbrokes Gala Coral will replace it as Britain's biggestbookmaker. In the faster growing online sector it will slip tothird, behind both Paddy Power Betfair and Ladbrokes Gala Coral,according to industry data.
With smaller business in the U.S., Australia, Spain andItaly, there are however other ways for William Hill to expand.
CEO Henderson wants to increase international revenues by 50percent by 2018, diversifying from a British market currentlyworth 82 percent of its 1.6 billion pound turnover.
Peel Hunt analyst Nick Batram said he expected the companyto return to 888 for talks but that its focus could turn tosmaller deals in the U.S., Latin America and Scandinavia.
"Gaming is a global market and I would expect them to belooking globally at where they might go," Batram said.
An example of William Hill's appetite for diversification isAugust's $25m purchase of a minority stake in U.S. based onlinelottery firm NeoGames, which operates in a $60 billion industry.
"ONE TO FEAR"
However, in the near term it is pressure closer to home thatthe company will need to try to ride out.
William Hill will not surpass 2014 pretax profit of 317million pounds until 2018, according to Reuters data, hit by anew tax on online bets made in Britain, and new rules crimpingretail income.
Rising competition now poses an extra challenge and sharesin the firm have fallen 14 percent in three months.
HSBC analysts have called a Betfair Paddy Power combination"one to fear" in the UK and Europe, as it benefits from anability to apply marketing and technology to a larger customerbase online, cross-sell Betfair's betting exchange product intoPaddy Power's strong retail arm, and uncover big savings.
Elsewhere Ladbrokes -- long an underperformer online -- willimmediately gain ground thanks to Coral's better performingbusiness, while marketing spend that has long trailed that ofrivals will match William Hill's budget by next year.
"There's a clear risk that it (William Hill) is pushed downthe rankings of customer awareness as it is faced by largercompetitors," HSBC analysts said, though the company insists ithas sufficient marketing firepower to compete.
Despite the deluge of deals the firm also has no sizecomplex either, according to HSBC analysts: "Ultimately, we seeit pressing on alone, perhaps buying more foreign assets anddeveloping its own technology internally," they said. ($1 = 0.6479 pounds) (Editing by Keith Weir)
