* Two firms in early merger talks
* Could create leading business with a near $5 bln value
* Ladbrokes shares up 20 percent
* Deal designed to boost online presence (Adds reaction)
By Kate Holton and Neil Maidment
June 23 (Reuters) - Shares in British bookmaker Ladbrokes jumped 20 percent on Tuesday on news of its merger talkswith Gala Coral, designed to create a $5 billion giant with thefirepower to get ahead in the key online gambling market.
The talks are the first major move by Ladbrokes ChiefExecutive Jim Mullen, who was appointed in March with a remit togrow digital services at Britain's second biggest bookmaker andclose the gap on market leader William Hill.
The two businesses would have around 4,000 betting shops,almost half the UK market, meaning Britain's competitionauthority would be likely to insist some shops are sold off inareas where they overlap.
If the talks are successful, the combined company could usecash generated by its high street business to spend morepromoting online services, an area where Ladbrokes hastraditionally been weak. Demand for online gambling is rapidlyincreasing on the back of mobile and tablet apps.
Gala Coral's strongly performing online business holds 8percent of a UK digital market led by Bet365, according toindustry research group H2GC. Combined with Ladbrokes' 6 percentthe two businesses would rival William Hill.
"This potential combination we think would make strategicsense," Bank of America Merrill Lynch analyst Simon Larkin said.
"It would create significant scale, offer 'substantial costsynergies' and, potentially have positive implications for theability to successfully turn around Ladbrokes' onlineoperations."
The talks come as consolidation hots up across the industry,with fast-growing online players searching for scale and moretraditional bookmakers looking for ways to bolster services andcushion the impact of tighter regulation and higher UK taxes.
In February, William Hill failed in a bid to buy onlinegambling company 888, which itself has said it is on thehunt for acquisitions. Online rival Bwin.Party is upfor sale and expects to reach a conclusion on takeover offerssoon.
In its statement, Ladbrokes said the talks were to combinethe entities of Ladbrokes and Coral Retail, Italian onlinebusiness Eurobet Retail and Gala Coral's online businesses.
"A merger with Gala Coral could create a combined businesswith significant scale and has the potential to generatesubstantial cost synergies, creating value for both companies'shareholders," Mullen said in a statement.
Exane Paribas analysts said corporate costs could be reduced by 33 million pounds a year in total, with managementand staff reductions and other synergies potentially reducingcombined operational costs of over 1.7 billion pounds by 5percent a year.
Mullen said that the Ladbrokes board has yet to decide ifthe deal was "strategically attractive". If the discussionsadvance, Ladbrokes may undertake an equity placing to strengthenthe balance sheet of the combined company, it said.
Shares in Ladbrokes traded 20 percent higher at 147p by 1149GMT. Ladbrokes said the proposed combination, if completed, maybe classified as a reverse takeover of Ladbrokes.
Gala Coral Group employs over 15,000 people and is owned bya group of private equity companies including Apollo, Anchorageand Cerberus.
($1 = 0.6330 pounds) (Additional reporting by Ankush Sharma and Aastha Agnihotri inBengaluru and Li-mei Hoang in London; Editing by Keith Weir andCatherine Evans)
