In a joint statement, the companies said GVC has offered to buy Ladbrokes Coral for about £3.9bn.
GVC shares gained 5.72% to 961.0p each in morning trading while Ladbrokes Coral's stock jumped 25.42% to 170.20p.
A deal would see Ladbrokes Coral shareholders own 46.5% of the combined group with GVC holding the rest.
Ladbrokes Coral - which operates 3,500 shops across England, Wales and Scotland - would receive 32.7p in cash and 0.141 ordinary GVC shares for each Ladbrokes Coral share.
It would also get a potential further value of up to 42.8p, depending on the outcome of the UK government’s Triennial Review into fixed-odds betting terminals (FOTBS) and its impact on profits.
The review is part of a government crackdown on FOTBs after MPs raised concerns the machines were too addictive and fuelled problem gambling.
“The boards believe that a transaction has the potential to create material shareholder value and that there is a compelling strategic rationale for the possible offer,” the firms said in the statement.
“The enlarged group would be an online-led globally positioned betting and gaming business that would benefit from a multi-brand, multi-channel strategy applied across some of the strongest brands in the sector.”
The companies added that a merger would enhance the enlarged group's position in a number of regulated online gaming markets, including the UK, Italy and Australia, and would boost GVC's current share of revenues from locally regulated and taxed markets to more than 90%.
Kenneth Alexander, chief executive of GVC, will take the helm on the merged company if a deal goes ahead.
Isle of Man-based GVC said it expects the transaction will be “double digit” earnings per share accretive from the first full year following completion and after the results of the Triennial Review, even if the maximum bet on FOTBs is set at £2.
The Department for Digital, Culture, Media and Sport said in October that the government would cut the maximum bet on the machines from £100 to between £2 and £50.
The news comes just a year after Ladbrokes and Gala Coral completed a merger.
In November, GVC sold its Turkish business for up to €150mln to Ropso Maltato to pave the way for potential merger with Ladbrokes Coral. Turkey had presented a roadblock in GVC's quest to buy Ladbrokes Coral since it is an unregulated market and vulnerable to sudden clampdowns.
"GVC's recent move to exit Turkey cleared the last barrier and LCL shareholders should be pleased to see the firm is now better insulated against the vagaries of the UK market," said Neil Wilson, senior market analyst at ETX Capital.
He added: "As long as GVC was willing to pay the right price, the tie-up has always made sense - the Isle of Man firm has little debt and has the global and fast-growing online presence, LCL has the physical footprint, high street name and sports book."