By Neil Maidment and Aastha Agnihotri
LONDON (Reuters) - Bwin.party ditched an agreed takeover deal with 888 on Friday in favour of a higher 1.06 billion pounds ($1.6 billion) cash and shares offer from GVC Holdings, creating a sports betting heavyweight in a sector being reshaped by consolidation.
GVC and 888 have spent months battling for larger rival Bwin in one of a number of deals being thrashed out in the industry as firms try to bulk up in response to higher tax bills and tighter regulation in Britain and continental Europe.
A source close to the situation said 888 was unlikely to make another revised offer, signalling victory for GVC.
"I think unless you have scale you are going to struggle to compete," GVC Chief Executive Kenny Alexander, who will lead the new group, told Reuters.
"In combining GVC and Bwin we will create one of the market leaders in online sports betting... able to compete in this new landscape."
Shares in Bwin rose 3.6 percent to 119.3p in early trade before tailing off, with GVC shares down 3.6 percent. 888 investors reacted badly to the news, with shares falling as much as 10 percent before recovering to trade 2.7 percent lower.
Sports betting will comprise around 70 percent of the enlarged group's revenue, with the firm expected to take over 4.5 billion euros ($5 billion) in sports wagers a year.
Bwin said GVC's higher offer as well as its track record of integrating acquisitions, such as that of Sportingbet in 2013, and a higher expected cost savings were all factors for switching its support.
Bwin, itself created by a merger announced in 2011, had recommended a 900 million pound offer from 888 in July over a higher and more complex bid from GVC.
However GVC worked to ease Bwin concerns around its financing and savings projections and an improved offer was enough to see off an increased 888 bid.
Bwin Chairman Philip Yea told reporters some of its investors had preferred an 888 deal but that it was very hopeful of gaining the necessary support for the GVC offer.
"There was a pretty even split of those (shareholders) that expressed views one way or the other. But we also had a significant block of shares that was happy to support the board on its deliberations," Yea said on Friday.
888 BECOMES TARGET?
The deal is likely to place further pressure on 888 and William Hill, whose position as Britain's leading bookmaker has come under been threat from this year's consolidation. The firm had a bid for 888 turned down in February.
Leading gambling companies Paddy Power and Betfair agreed a merger in principle last month, while Ladbrokes (LONDON:LAD) and Gala Coral have struck a similar deal.
GVC, which has a market capitalisation roughly a third the size of Bwin, will see the new group's market value rise to around 1.25 billion pounds.
GVC's offer of 25 pence in cash and 0.231 new GVC shares works out to about 129.64 pence per Bwin share based on Thursday close. 888's latest cash and shares offer had a value at about 115p, two sources familiar with the matter said.
GVC's offer is at a 45 percent premium to Bwin's stock price when it first received takeover proposals in May.
The deal will boost the group's ability to explore unregulated markets in Latin America and Asia, where higher returns can be reinvested in a more competitive European sector.
GVC said it would fund the cash portion of the deal through a 400-million-euro loan from Cerberus and would raise 150 million pounds through a placing of new shares.
AIM-listed GVC said it would seek main market listing after the completion of the deal and has promised benefits of at least 125 million euros per annum by end of 2017.
