GALA, the bingo and casino operator, is competing with private equity firms to buy Coral, Britain’s third-biggest bookmaker, in a £2 billion bidding race.

The company, boosted by the recent acquisition of Permira, the venture capitalist, as a 30 per cent shareholder, is understood to be holding preliminary talks with Coral aimed at creating a £4 billion gambling company.

Coral recently appointed Lehman Brothers as advisers to a possible £800 million initial public offering. However, publicity over its plans is understood to have attracted interest from potential bidders and the company is thought to be running a twin-track process.

Although Gala is likely to face stiff competition from private equity firms, the ability to leverage cost synergies and cross-sell gambling products could give it an advantage over pure financial bidders.

It is thought that talks are at a preliminary stage, and no formal offers have been tabled.

Gala operates 168 bingo clubs and 30 casinos while Coral has about 1,260 betting shops. Both have big internet operations that would benefit from a merger.

It is believed that if Gala’s bid is successful it plans to pursue an IPO within 18 months to two years, a move that would take it into the FTSE 100 index.

Both Neil Goulden, Gala’s chief executive, and Dominic Harrison, who was last week promoted to the Gala board, have worked at Ladbrokes, Britain’s biggest bookmaker.

A flotation or sale of Coral would provide an exit for Charterhouse, the private equity firm that acquired the company in a management buyout for £860 million (including debt) in September 2002. It would also deliver paper fortunes for Coral’s management team, including the chief executive, Vaughn Ashdown, and finance director, Mick Mariscotti. The 16 per cent holding of the management would be worth £128 million. Charterhouse owns the remaining

84 per cent.

Although a flotation was initially understood to be the management's preferred option, a potential buyer would have to find at least £2 billion to take control of Coral — £800 million for the equity and £1.2 billion to assume the group's debt.

Over the summer, Gala abandoned what would have been one of the year’s biggest stock market floats for a £1.3 billion refinancing — its second in seven months. The sale of a stake to Permira by Cinven and Candover, Gala’s owners, left the buyout firms with roughly 30 per cent each and valued the company at £1.9 billion.