The two bookmakers have agreed a deal in principle that will create one of the world’s largest online gambling companies by revenue. Under the terms of the deal, Paddy Power will own 52 per cent of the combined business, with Betfair given 48 per cent.
Shares in Betfair were up more than 17 per cent on the news, while Paddy Power shares rose 16 per cent.
Breon Corcoran, chief executive of Betfair, will become chief executive of the combined group, with Paddy Power's chief executive Andy McCue given the role of chief operating officer.
The group's revenue will exceed £1.1bn based on their last financial years, while the bookmakers will be better placed to compete in existing markets, a joint statement between the pair said.
This is the latest in a string of consolidations in the gambling industry, with Labrokes and Gala Coral announcing a £2.3bn tie-up last month.
The news came on the same day Paddy Power released its half year results, demonstrating strong growth in revenue and profit, the company anticipating it will exceed analysts’ full year expectations.
Paddy Power shareholders will also receive a special dividend of €80m (£58.4m).