William Hill yesterday confirmed it was in talks to buy about 600 betting shops from Stanley Leisure in a move set to create Britain's biggest bookmaker.
The company is considering a bid worth more than £500 million for the estate of Stanley.
While a deal would take William Hill beyond the 2,000 outlets operated by Ladbrokes, it is expected to face competition from other parties, possibly Coral and the Tote.
In a statement, William Hill said it was in exclusive discussions with Stanley while it also carried out due diligence on the business, which generated turnover of £1.48 billion in the year to May 2004.
It added: "There is no certainty at this stage that the full terms of a transaction will be agreed. No announcement is expected until the outcome of the discussions."
A sale of the betting business, which trades as Stanleybet, would leave Stanley with its casino arm, which owns Birmingham's Star City Casino.
The deal will also fuel speculation that Stanley Leisure could be moving towards a merger with casino firm London Clubs International.
William Hill said it had postponed plans to return £ 453 million in cash to shareholders, while it examined the potential acquisition.
Explaining its decision, the company said: "Although there can be no certainty at this stage that a transaction will be agreed, the board of William Hill believes that the potential acquisition represents a particularly attractive opportunity for William Hill and should be evaluated before proceeding with the return of capital exercise."
But analysts cautioned that the price tag was high. Robin Chhabra at Evolution Securities said the move could dilute the quality of William Hill's portfolio, and it would struggle to get Stanley's northern-focused estate to the level of its own southernfocused chain.
"There's a significant execution risk at this price," he said. "Hill's shareholders might rather just have the money."
Although the deal could spark competition concerns - as William Hill would be left with around a quarter of the total UK estate of 8,500 sites - the two companies' differing strengths in the north and south of the country could placate the regulator.
The announcement came a month after William Hill said it had put thoughts of expanding into casinos on the back burner after deciding that gambling deregulation would not offer the hoped-for benefits.
In its last financial year, covering the year to December 28, William Hill said its bookmaking division raised profits to £165.5 million.
William Hill shares closed down 15p at 558p.