LONDON—Paddy Power PLC and Betfair Group PLC have agreed to a near $8 billion merger to create an international sports-betting and online-gambling group with leading positions in the U.K., other parts of Europe and Australia.

Shareholders in Dublin-listed Paddy Power would own 52% of the merged company and receive an €80 million ($89.3 million) special dividend, while London-listed Betfair's shareholders would own 48%, the companies said on Wednesday.

Paddy Power is one of the largest bookmakers in the U.K., Ireland and Australia in revenue terms and operates in Italy, France and Canada, according to its website. Betfair was launched in the U.K. in 1999 and floated on the London Stock Exchange in 2010. The companies have combined revenue of around €1.5 billion.

News of the proposed tie-up comes amid a flurry of consolidation in the sector, particularly in the U.K. where the government has imposed a new tax on online gambling. Regulations for online betting have also tightened elsewhere in Europe, constraining growth and focusing companies' attention on how to lower costs.

Online gambling groups Bwin. Party Digital Entertainment PLC and 888 Holdings PLC announced a merger in July. Betting shop operator Ladbrokes also said last month that it will merge with Gala Coral in a stock deal that will create a betting and gaming company worth around £ 2.3 billion ($3.7 billion).

Investors liked the odds of the Paddy Power-Betfair merger being a success. Shares in Paddy Power rose more than 18% while Betfair shares jumped 17% in early trading.

"The combined group's scale and capabilities would leave it better placed to compete in existing and new markets," the companies said. The companies plan to keep their separate brand names.

The structure of the possible merger is still being completed though the companies have agreed on who would run the combined group, they said. Paddy Power Chairman Gary McGann would chair the merged company whose chief executive would be Breon Corcoran, currently Betfair's CEO.

Citi analyst James Wheatcroft said he wasn't surprised by the proposed merger, which comes after the imposition of a new online gambling tax in the U.K. The new levy has "triggered a financial and strategic rationale" for consolidation in the sector, Mr. Wheatcroft said.

Wednesday, Paddy Power also reported a 31% rise in pretax profit for the six months ended June 30 to €80.5 million from €61.6 million the previous year and said full year operating profit is "expected to be ahead of 2014 and the consensus market forecast."

Betfair reported a 15% rise in revenue for the quarter ended July 31 from the same period last year to £ 135.4 million.

Write to Rory Gallivan at rory.gallivan@wsj.com

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(END) Dow Jones Newswires

August 26, 2015 05:25 ET (09:25 GMT)

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