Updated from 1:13 p.m. EST

Shares of Penn National Gaming ( PENN) and Argosy Gaming ( AGY) soared Thursday as investors bet on a big payoff from their merger.

Late Wednesday, the companies said Penn National plans to pay $47 a share in cash for Argosy, a 15% premium to Argosy's Wednesday closing price of $40.75. The transaction, valued at about $2.2 billion and expected to close in the second half of next year, includes roughly $805 million of Argosy's long-term debt, but the companies said it would be "immediately" accretive to Penn National's earnings a share.

The resulting company will be the third-largest casino operator in the U.S.

In reaction, Argosy shares jumped $4.59, or 11.3%, to $45.34. Penn National shares gained even more, however, and were up $10.06, or 24.3%, at $51.50, as investors bet on a big boost to the company's EPS.

The announcement appeared to prompt speculation about which other smaller-capitalization gaming companies might make attractive acquisition targets, boosting shares of Isle of Capri Casinos ( ISLE) $4.92, or 24.0%, to $25.44.

Merrill Lynch analyst David Anders estimated that if the combined company can generate $25 million in cost savings, the purchase will add about 91 cents to Penn National's annual EPS. Before the announcement, Wall Street analysts' average EPS estimates were $2.38 in 2005, and $2.93 in 2006, according to Thomson First Call.

"We are maintaining our price target of $47 on Penn, however, in light of yesterday's announcement we believe this target may be conservative," Anders wrote in a research note. He added the shares could be worth between $50 and $53, assuming cost savings, a combined adjusted EPS of $3.31 and a price-to-earnings multiple of 15 to 16. (Merrill Lynch does and seeks to do business with companies covered in its research reports.)

Penn National's purchase of Argosy would create a gaming powerhouse with annual revenue of more than $2 billion, more than 20,000 slot machines and about 700,000 square feet of casino space. The deal would "essentially" double Penn National's revenue and EBITDA (earnings before interest, taxes, depreciation and amortization), said Peter Carlino, Penn National's chief executive.

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