LONDON/FRANKFURT (Reuters) - Germany’s TUI AG (TUIGn.DE) unveiled a tie-up of its tourism unit with Britain’s First Choice FCD.L to boost its position as Europe’s biggest travel firm in the face of new competition from merging rivals.
The two firms said on Monday they planned to create TUI Travel Plc, a London-based tourism giant 51 percent-owned by TUI with about 12 billion pounds ($23 billion) of revenues, just weeks after rivals Thomas Cook KARG.DE and MyTravel MT.L announced plans to merge.
Analysts said the move by Thomson Holidays owner TUI and First Choice cast uncertainty over the whole industry.
“You can argue whether regulators would allow the big four to go down to the big three,” said Kepler analyst Mark Reed. “And so there must be even more of a question mark whether they will let it (the industry) go down to the big two.”
TUI and First Choice said the combined business will be headquartered and listed in London, with 49 percent owned by First Choice shareholders. First Choice revenues were 2.72 billion pounds in the year to October 31, while TUI’s TUI Travel had pro-forma sales of 9.37 billion pounds in 2006, they said.
“I think it is a very good deal and (TUI) shareholders will be happy as it makes the tourism unit more transparent because it is now listed,” said Martina Noss, an analyst at NordLB bank.
First Choice shares leapt more than 10 percent to a record 315 pence, while TUI gained more than 14 percent.
The travel industry has had a torrid few years, with an oversupply of package holidays exacerbated by more people planning their own trips using budget airlines and the Internet.
First Choice Chief Executive Peter Long, who will take up that position at TUI Travel, said the changing face of the industry meant he was confident competition regulators would clear the tie up with TUI’s tourist business.
“We don’t anticipate any issue, because the definition today of our market place is very different to what it was a number of years ago,” he told reporters on a conference call.
Kepler’s Reed said First Choice was in a win-win situation, as regulators would either block all major mergers in the sector, which would remove the new threat from a combined Thomas Cook-MyTravel, or they would let the deals go ahead and the new TUI Travel business would be in a stronger position to compete.
The German firm, which also has a major shipping division, separately announced a net loss after minorities of 893.3 million euros ($1.19 billion) for 2006, hit by 764 million euros of writedowns. Earnings before interest, tax and amortization for its tourism business totaled 393.7 million euros.
Long said First Choice had started the latest round of consolidation by looking to sell its package holiday business. MyTravel had originally looked to buy this, before agreeing a merger with Thomas Cook, which is owned by German stores group KarstadtQuelle KARG.DE.
“The opportunity (to merge with TUI’s travel business) wasn’t there prior to the starting of consolidation ... We initiated that consolidation and it’s turned out in a different way to the road we initially started on,” Long said.
TUI and First Choice said the new company, with about 27 million customers in 20 markets, would deliver annual cost benefits of at least 100 million pounds before tax, to be fully realized within three years of completion.
Thomas Cook and MyTravel have said they expect to make about 75 million pounds of cost savings.
Long said about one-third of the savings would come from combining TUI’s and First Choice’s airline businesses, with the balance coming from “back offices across the businesses”. It was too early to say how many jobs would be affected, he added.
Analysts said Long faced an uphill battle to improve profitability at TUI, which has remained focused on package holidays while First Choice has branched out into adventure and specialist holidays, such as trekking and sailing.
“The question remains whether TUI can achieve solid margins in the tourism business in the medium term,” said Nils Lesser, an analyst at Merck Finck in Frankfurt.
Analysts say TUI’s tourism unit EBITA margin is around 2.8 percent and First Choice’s is around 5. Restructuring should help the combined margin rise to 4.5 percent in a few years.
TUI said it will contribute about 875 million euros of net financial debt to the new group, including all pension liabilities currently associated with TUI Travel.
At 1330 GMT, First Choice shares were up 9.6 percent at 311-1/4 pence, valuing it at about 1.65 billion pounds. TUI shares were up 10.2 percent at 18.20 euros, giving a market value of about 4.6 billion euros.