A new UK-based company called Kuoni Holdings plc will be formed to run the combined group, and its shares will be listed in both London and Zurich. Kuoni shareholders will own 53 per cent of the new group with the remainder owned by holders of First Choice shares.
The deal, news of which was sneaked out on Budget day last week, marks a fresh stage in a process sparked by the Monopolies and Mergers Commission in 1997 when it gave a clean bill of health to competition within the UK market.
Since that report, Thomas Cook has bought the UK activities of Carlson, the US group, in a deal that creates a pounds 25bn-a-year business. The company's Sunworld holiday business has snapped up Flying Colours - which includes the Club 18-30 holiday business - for pounds 50m.
First Choice has bought tour operator Unijet and upmarket travel company Hayes and Jarvis in a joint deal worth pounds 134m. Thomson Travel has made seven acquisitions since its flotation last May, including Simply Travel and the Polish company, Scan Holiday.
Yesterday's merger marks a departure from the strategy of previous deals. Rather than pursuing vertical integration between travel agency, tour operators and charter airlines in the UK, the Kuoni/First Choice deal marries a UK high-volume tour operator with an international travel group whose sales operations cover a wide geographical spread. This means the merger is unlikely to encounter opposition from UK or European competition regulators.
Ian Clubb, the chairman of First Choice, told The Independent: "The key reason behind this merger is that it creates a company that would be capable of participating in the next round of consolidation that we believe will occur in the European industry."
He said the merger put First Choice, which had suffered from a small market capitalisation, on a similar ranking to the UK market leaders in terms of size, Thomson Travel and Airtours.
"Our view is that in the UK most of the consolidation that can happen has happened. There are four companies with something like 80 per cent of the market and it is our view, based on experience and advice, that combining any two of those four would end up with serious competition problems."
He said a referral to the MMC would take six months, while a second-stage European Commission competition inquiry would take another five. "The thought of keeping First Choice hanging about for that length of time is just anathema," said Mr Clubb.
There had been speculation that Airtours, the second-biggest UK operator, might step into the fray and bid for First Choice, which held third place before the Kuoni deal. But it is highly likely that such a deal, which would have created a leviathan with one-third of the UK market, would have been blocked, especially in the wake of Government's decision to launch a wide-ranging inquiry into high-street prices.
First Choice shares fell 14.5p to 173p yesterday as rumours of a rival bid receded.
Mr Clubb said Kuoni Holdings plc would be ideally placed to take advantage of the next wave of consolidation in Europe. "We would have found it very difficult as First Choice to make a big step into Europe, but with the multi-cultural Kuoni team that's easy to achieve and we will have the financial muscle to do it," said Mr Clubb, who becomes executive chairman.
The merged group will be behind Germany's Preussag in Europe, but a leadership battle is not on the cards as profits, not size, is the key, Kuoni said.
Financial figures published by the two companies yesterday showed that First Choice made a pre-tax profit of pounds 50m in the year to October, a 330 per cent rise on the pounds 15.4m it made in 1997. Turnover rose about 20 per cent to pounds 1.24bn. Kuoni increased its profits to pounds 62.6m in 1998 from pounds 56.7m on sales up by pounds 460m to pounds 2.25bn.
Kuoni Holdings will include a wide range of businesses. First Choice brings a 250-strong retail network, its tour operation business in the UK, Ireland and Canada and the Air 2000 airline. Kuoni's businesses include premium long-haul holidays, a charter airline and one of the largest Swiss travel agencies.
The two groups said there would be extensive benefits from the merger. Kuoni Holdings will have strong positions in the leisure markets in Austria, Canada, Denmark, France, India, Ireland, Italy and the Far East, as well as in the home markets of the two merger partners.
Other benefits include savings in buying aviation fuel and insurance and making more efficient use of the combined operations' resources. Mr Clubb said it was too early to detail exactly what cost savings would be made through the merger, but he made clear there would be no job cuts among the 11,000 workers.
A major benefit, especially for investors worried by the cyclical nature of the travel business, will be a greater ability to manage seasonal capacity and demand across different geographical markets.
Where this leaves the rest of the UK industry is unclear. The consolidation to date has been driven by two factors. First, the MMC report opened the floodgates for acquisitions as it hinted that there would be no regulatory problems for further vertical integration other than in the travel insurance business.
But that process has largely been completed and only two independent tour operators with more than 1 per cent market shares remain - Cosmos and Inspirations.
The second factor has been the growing trend towards long-haul holidays at the expense of the traditional package holiday to the Mediterranean. Industry figures show that long-haul holidays have grown by 12.3 per cent over the past four years compared with a 1.4 per cent fall in short-haul.
One industry analyst said: "This is what the First Choice deal is about - putting Kuoni's high-margin premium long-haul business together with the First Choice low-margin package holiday to Majorca."