In what could be a prelude to a takeover bid, European Leisure has acquired an 18.5 per cent stake in Waterfall Holdings, a publicly-quoted rival snooker club operator in Britain.

The stake was purchased from First Leisure Corporation for £2.9 million sterling. European Leisure has described the purchase as "opportunistic". A spokesman said the group would "not be doing anything initially . . . we will keep a watching brief". Asked about board representation, the spokesman said: "We have not been invited."

Waterfall Holdings was set up in 1993 by Mr Martin Callan, a former senior executive of First Leisure. Asked about giving European Leisure board representation, he said: "It is not their right . . . we have to have time to digest the news." Mr Callan, who has a 10 per cent stake in Waterfall, said: "We believe in our strategy in going forward in our own way." Waterfall is "very strong . . . we are doing very well and not seeking to be taken out". If European Leisure were to make a bid, it would have to offer well in excess of the 45p per share it has paid First Leisure. Prior to the announcement yesterday afternoon, the shares were being traded at 63p and they had hit 93p.

European Leisure is already showing a handsome paper capital gain of more than £1 million. Obvious operational benefits would flow from a merger of European Leisure and Waterfall. But European Leisure, which had a gearing of 50 per cent in June - this has risen following the payment out of bank borrowings to First Leisure - would benefit from Waterfall's strong net cash position.

Waterfall recorded a profit before tax of £630,000 in the year to September 29th, 1996, on net assets of £6.3 million. The consideration is on a high profit multiple of 15.7 and at a substantial premium on the net assets. However, Waterfall is understood to have been growing at a fast pace this year which would reduce the multiple.