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Sportech said it had received a takeover proposal from the Vancouver-based firm. With a market capitalization of just under $300-million, Sportech is 16 times bigger than Contagious, which is worth only around $18.5-million.KingJC/Getty Images/iStockphoto

Junior Canadian gambling software company Contagious Gaming Inc. acknowledged it is in discussions to buy its much larger United Kingdom-based competitor Sportech PLC., but says any transaction would be subject to a number of conditions, including securing financing.

On Friday, Sportech said it had received a takeover proposal from the Vancouver-based firm. With a market capitalization of just under $300-million, Sportech is 16 times bigger than Contagious, which is worth only around $18.5-million.

While Contagious generated only $1.2-million in revenue last year, Sportech took in $213-million. Sportech makes most of its profits from running the Football Pools, with about 300,000 people a week betting on the outcome of soccer games. The format has been around in Britain since the 1920s.

Deals of this kind aren't entirely unheard of in the gambling sector.

Just over a year ago, Montreal-based Amaya Inc. swallowed Rational Group Ltd., the owner of PokerStars, for $4.9-billion (U.S.). At the time, PokerStars was more than four times larger than its acquirer. Amaya borrowed huge and convinced investors to buy its stock at a massive premium to get the deal done.

The Amaya/Poker Stars deal "ended up being very lucrative for shareholders" wrote Vahan Ajamian, an analyst with Beacon Securities Ltd. in a note to clients, and he believes Contagious can pull off its own version of a minnow swallowing a whale.

Amaya/PokerStars "provides a recent precedent for investors that this kind of thing is doable, and it can get done, and a year later you could be up huge on your money," said Mr. Ajamian in an interview.

Contagious's hands seem to be somewhat tied in terms of how it can finance the deal, though. In a release, Sportech said any takeover offer would be composed of "a majority in cash," and the rest in shares. Contagious has only a few million in cash on its balance sheet, so that means the company is potentially looking at a gigantic loan.

That's not necessarily a bad thing for shareholders. The less equity Contagious has to issue, the higher the potential gain is for its shareholders, according to Mr. Ajamian.

"Should Contagious use debt to fund a portion of the transaction, we could foresee a scenario where the resulting shares have a total value of $0.86/share," he wrote. With Contagious's stock currently trading around $0.25 (Canadian) on the TSX Venture Exchange, shareholders are potentially looking at a big bump.

Should Contagious hammer out a deal with Sportech, rival bidders could emerge. However, because Contagious and Sportech seem to be on friendly terms, any potential deal is likely to be recommended to both sets of shareholders, said Mr. Ajamian, and would put Contagious in an advantageous situation vis-à-vis other suitors.

The Canadian online gambling sector has seen a number of high-profile mergers and acquisitions this year, including the Intertain Group Ltd. buying $812-million in assets from British company Gamesys Ltd., and NYX Gaming Ltd. acquiring Chartwell Technology and CryptoLogic from Amaya for $150-million.

Sportech and Contagious declined a request for comment.