The two companies announced the surprising deal in a joint statement published on August 26 by the London Stock Exchange.
"The boards of Paddy Power and Betfair are pleased to announce that they have reached an agreement in principle on the key terms of a possible merger of Paddy Power and Betfair to create Paddy Power Betfair plc," the statement writes. "The possible merger would create one of the world's largest public online betting and gaming companies by revenue with enlarged scale, capability and distinctive and complementary brands."
The combination has compelling strategic logic and represents an attractive opportunity for both companies.
Upon completion the merger would lead to the creation of a new company named Paddy Power Betfair. Paddy Power shareholders would control 52 percent of the new company while current Betfair shareholders would control the remaining 48 percent.
"The combination has compelling strategic logic and represents an attractive opportunity for both companies to enhance their position in online betting and gaming and to deliver synergies, customer benefits and shareholder value."
According to the statement, the completion of the deal would also entitle PaddyPower shareholders to a special €80-million dividend. The finalization of the deal, however, would not lead to the creation of one single operator, as Betfair and Paddy Power are supposed to operate in the European markets as separate brands.
PaddyPoker and Betfair's board believe that the new company would become "one of the world's largest public online betting and gaming companies." The companies both had revenues of over €1.5 billion in the most recent financial years.
The statement also specifies that Gary McGann, the Chairman of Paddy Power, would serve as Chairman of the Board of the new company, while Betfair's Chief Executive Officer (CEO) Breon Corcoran would become the CEO of the combined group.
Meanwhile, Paddy Power's CEO Andy McCue would become the Chief Operational Officer and an Executive Director of the combined group, while Betfair's Chief Financial Officer (CFO) Alex Gersh would become CFO and an Executive Director of Paddy Power Betfair.
"Discussions remain ongoing regarding the other terms of the possible merger," the statement continues. "Paddy Power has until Sept. 25, 2015 […] to announce either a firm intention to make an offer for Betfair […] or announce that it does not intend to make an offer."
The merger deal between Paddy Power and Betfair is yet another clear sign of how intense the competition on the gaming and sports betting market has become.
As 888 Holdings and GVC continued their bidding war to take control of the bwin.party Group, the market started to see some significant movement with a $3.4 billion deal signed in July by Ladbrokes and the Coral Group, which will lead to the creation of the U.K.' biggest bookmaker.