Casino operators Stanley Leisure and London Clubs International have confirmed they are in discussions over a possible merger.
The two companies opened talks in the last two weeks over a deal which would create a gaming giant worth around £700 million with more than 50 casinos across the UK.
The talks will come as no surprise in the City after Stanley sold its estate of bookmakers to William Hill for £504 million last year to concentrate on its casinos. Speculation over a possible merger has been rife since Malaysian conglomerate Genting took stakes in the two businesses last year.
Genting is Stanley's second biggest shareholder with a stake of almost 12 per cent and it owns nearly 30 per cent of LCI. In a joint statement to the stockmarket yesterday, Stanley and LCI said discussions were "ongoing" but warned there was "no certainty that they will lead to a transaction".
Consolidation of the industry has been on the cards in the UK since the shake-up of gaming laws paved the way for international operators to run new super-casinos proposed by the Government.
Earlier this month Stanley bought the Harbour House casino in Southampton for £5.9 million to add to its estate which includes Crockfords, The Colony Club, The Mint and The Palm Beach casinos in London as well as sites in cities such as Bristol, Liverpool and the Star City casino and the Midland Wheel and China Palace venues in Birmingham.
Rumours of consolidation and improved trading since the gaming laws were relaxed has helped boost Stanley's share price from 418p in January 2005 to a high of 875p earlier this year, although it closed at 635p on Friday valuing the firm at £444 million.
Last month Stanley reported a surge in visitors to its provincial casinos on the back of the deregulation, which lifted the rule forcing new punters to register 24 hours in advance and scrapped limits on jackpot prizes.
Shares in LCI, which recently sold Mayfair Les Ambassadeurs casino for £115 million, have been more volatile and have fallen from 149.5p to 107p, valuing the company at £239 million.
LCI operates four casinos in London including Fifty and The Sportsman, as well as The Rendezvous in Southend and Brighton. It plans to open Manchester235 in Manchester in October.
The companies said the merger would involve the exchange of one new Stanley share for every six LCI shares.
Analysts suggest an enlarged group could spark interest from bookmaker Ladbrokes or an international operator looking for a way into the UK.
"This enlarged entity could prove to be a very attractive target to any larger gaming operator," said Altium analyst Greg Feehely.
One analyst said the two parties should perhaps wait to see the outcome of the new licence awards before jumping in feet first with any merger plans.
"Whilst we think the long-term rationale for such a deal is compelling, the timing ahead of the allocation of new casino licences is questionable," said Investec analyst Matthew Gerard.
Stanley Leisure shares closed up 7.5p at 642.5p.