Harrah's Entertainment ( HET) and Caesars Entertainment ( CZR) are considering a merger to create the world's largest casino operator, but many on Wall Street took a dim eye of the move on first blush, saying it makes no strategic sense and would likely draw the ire of government regulators.

According to sources close to the deal, Harrah's is looking to buy Caesars, which is said to be open to the offer, and could make an announcement in the coming days. The move comes just one month after MGM Mirage ( MGG) bought Mandalay Resorts Group ( MBG) for $4.8 billion and cash and more than $4 billion in debt , creating the largest gaming company in the world.

Terms of the deal, especially with regards to how much Harrah's was willing to pay, were not announced but sources close to the deal termed it "significant." Shares of Caesars skyrocketed on the news, gaining $2.18, or 15.7%, to $16.10. Harrah's shares slid $1.27, or 2.4%, to $50.71.

If combined, Harrah's and Caesars would leapfrog MGM-Mandalay as the largest casino operator in the world, with 54 casinos across an extremely diverse array of markets, from glitzy upscale resorts to decidedly down-market gambling halls. In Las Vegas, the combined companies would control Harrah's, Caesars, Bally's, Horseshoe, Paris, Grand and Showboat, consolidating another chunk of the Strip not owned by the combined MGM-Mandalay.

All told, the duo would have nearly 100,000 employees and $8.8 billion in annual revenue. In comparison, the combined MGM-Mandalay would have 28 casinos and $6.4 billion in annual revenue.

(Neither Caesars and Harrah's were available for comment on Wednesday.)

Too Big to Fly?

Both deals are expected to draw scrutiny from the Federal Trade Commission as well as regulators in a number of jurisdictions, especially with regards to the Las Vegas Strip, where the two potentially giant-sized companies would form a de facto oligopoly. Already, MGM will have to divest some properties to comply with government regulations in some markets, notably Detroit, and some analysts say a potential merger between Harrah's and Caesars could jeopardize the approval of both deals.

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