First Choice left out in cold as Thomas Cook clinches MyTravel deal

MyTravel cemented its recovery from the ashes of Airtours yesterday with a £2.8bn deal to merge with its European arch rival Thomas Cook.

Despite the fact that the deal creates a group with an estimated 35 per cent share of the UK package holiday market, European competition regulators are tipped to wave through the deal rather than risk a repeat of the fiasco that has left Brussels facing a multimillion-pound lawsuit for blocking the 1999 tie-up between the then Airtours and First Choice.

Thousands of jobs across the UK are at risk from the deal, which is a defensive move to compensate for the slow death of the package holiday as consumers instead opt to book their own trips.

The merger, which will see Thomas Cook return to the UK stock market after a six-year break, is expected to save the enlarged group at least £75m a year once the integration process is complete in 24 months' time.

The new company - Thomas Cook Group - is expected to close travel agencies, get rid of aircraft and even axe holiday brands to wring savings out of the deal. It will also be able to cut capacity, which will shore up embattled profit margins. Full details of what was being dubbed "organisational consolidation" will be revealed in the prospectus, due to be issued within the next eight weeks.

Thomas Cook's decision to swoop on MyTravel (its German owners, the retail consortium KarstadtQuelle, will control 52 per cent of the enlarged share capital) put paid to First Choice's hopes of offloading its own mainstream holiday business. First Choice was forced to admit yesterday that talks to sell its biggest division had ended after its two keenest suitors opted to tie their own knot.

First Choice's mainstream arm had also attracted separate attention from Virgin Holidays and the private equity group Permira, but both pulled back after the mooted sale price jumped skywards. A Virgin Holidays spokesman said the company was still "watching events closely" but First Choice, the UK's fourth biggest travel business, is not thought to be desperate for a fire sale. Its shares still fell 14 per cent to 264p.

It is the second time that KarstadtQuelle has swooped on the UK travel market. It acquired Thomas Cook in April 2001 just weeks after TUI, its German rival, snapped up Thomson Holidays. Analysts estimated that KarstadtQuelle, which owns the Karstadt department store chain, was paying an implied premium of 15 per cent to take control of MyTravel. It also gets its hands on around €1.2bn of tax losses on MyTravel's books.

In return, the German group will dominate the enlarged travel company. Manny Fontenla-Novoa, Thomas Cook's chief executive, will run the new tour operator, which will be chaired by Thomas Middelhoff, KarstadtQuelle's chief executive. Thomas Cook's finance director Ludger Heuberg will take the same position in the new group.

Peter McHugh, the MyTravel chief executive who saved the group from going bust, has booked himself an early retirement on 31 December. Until then Mr McHugh, a former PanAm executive, will oversee the group's integration.

The City welcomed the deal, sending shares in MyTravel up 28.5 per cent to 306p. The group, which started life as Airtours in the early 1970s, nearly went bust five years ago but has been transformed by Mr McHugh. The MyTravel chief executive has been well rewarded for his pains: he has already pocketed a £2m bonus for pulling off the restructuring and he will be able to cash in share options worth almost £5m when the deal completes.

"MyTravel shareholders will benefit from a 48 per cent share of synergy, an injection of new management, and an improved strategy," analysts at ABN Amro said.

It is likely that the MyTravel brand will be one of the casualties of the merger, bringing the curtain down on the darkest period in the company's history. Under Mr McHugh's predecessor, Tim Byrne, the company nearly collapsed into its own accounting black hole but it was pulled back from the brink by a debt-for-equity swap and months of intensive care.

MyTravel ran into trouble after an over-ambitious acquisition spree in the wake of the European Commission's decision to ban it from joining forces with First Choice in 1999. That deal was blocked by competition regulators in Brussels over fears it would create a "collective dominance" of the UK's short-haul leisure travel market.

But in a snub to Brussels, the Court of First Instance, the lower branch of the European Court of Justice, said regulators had failed to prove the deal would have "adverse effects" on the travel market. MyTravel is four years into an attempt to sue the EC for more than £500m in lost profits from the failed deal.

Competition lawyers said yesterday that the memory of that embarrassment alone would be enough to stop Brussels from ruling against MyTravel's new merger plans. In any case, the European holiday market has been transformed by the advent of low-cost airlines during the past eight years, they added.

Alistair Gorrie, competition lawyer at Orrick, Herrington & Sutcliffe, said: "Things have moved on in the travel industry. The package holiday industry is in decline and people doing their own thing is much more normal. The deal is not clearly a no-no, whereas a few years ago it might have been."

Industry figures show that package holidays as a share of the number of UK holidays taken overseas have fallen from 54 per cent in 1998 to 41 per cent last year. As an absolute figure, the number of package holidays taken abroad has dwindled from a high of 20.6 million in 2002 to 19 million last year. By comparison, the number of independent bookings made has soared over the same timeframe, almost doubling to 27.4 million (see graph).

Taking the widest definition of the UK short-haul holiday market, a combined MyTravel/ Thomas Cook would have a 13 per cent share. That contrasts with an estimated 35 per cent share of the traditional all-inclusive sun, sea and sand market.

The two groups expect the deal - being effected by a scheme of arrangement - to complete in June. It hinges on approval from MyTravel's shareholders and on an earlier agreement that will see KarstadtQuelle acquire Lufthansa's 50 per cent stake in Thomas Cook. MyTravel will pay its German suitor a £10m break free if another bidder emerges.

Mr McHugh said MyTravel had set its sights on Thomas Cook after a strategic review last spring. Its Airtours brand is a good fit with the core Thomas Cook brand because they serve slightly different niches of the package holiday market, he said. Although they fly to similar destinations, Airtours offers mainly three-star hotels, while Thomas Cook has rooms in four-star properties.

Although Mr Fontenla-Novoa stressed the mainstream package holiday market would remain at the heart of the new Thomas Cook Group, he made it clear the company would chase opportunities in the independent travel, online and financial services segment of the business.