Europe may block £3bn tour operators merger

The £3bn merger between First Choice Holidays and the travel arm of Germany's TUI to create a global giant could be blocked by the competition regulators.

Confirmation of the deal comes just six weeks after MyTravel and Thomas Cook announced they were to merge and prompted competition experts to question whether the second deal could scupper the first. If both deals were to go ahead, it would leave only two major tour operators in the UK market, down from four.

The German company is to merge its tourism unit - excluding its hotels - with First Choice, in a deal worth up to £4.5bn including £850m debt. TUI will own 51 per cent of the new company, while First Choice shareholders will own the rest. The merger will cut costs by around £100m a year with many reductions taking place in the UK, where the combined group has 1,100 high-street stores. However, the company would not be drawn on the number of potential job cuts.

First Choice's chief executive Peter Long, who will head the enlarged group TUI Travel, insisted yesterday that "the marketplace had fundamentally changed" since the European Commission blocked First Choice's proposed merger with MyTravel's previous incarnation Airtours in 1999.

It was no longer relevant to simply compare tour operators because the growth of budget airlines and the increasing number of independent travellers had to be taken into account, he said.

"We have spent a lot of time talking with competition lawyers," he said. "We can demonstrate quite clearly that the market can no longer be measured with just the traditional tour operators. It is not that relevant." The merger with TUI's travel arm is an exciting growth opportunity, he said. "The last thing on our minds is a spoiling tactic," he added.

According to data from JP Morgan, TUI has 15 per cent of the UK market. Thomas Cook has 11 per cent, while My Travel has 10 per cent and First Choice 9 per cent.

Alistair Gorrie, a partner at the law firm Orrick, said the marketplace had certainly evolved over he previous seven years. "There is a lot of competition for holidays," he said. If the commission were to look at just one of the deals, it would probably not run into difficulties. But having two deals in a short period of time makes it more difficult, he said. "Four down to two may not represent the total market but it is a significant segment of it," he said. This could even be "a bit of a spoiler", he added. "They cannot ignore one case while looking at another."

Becket McGrath, a partner at Berwin Leighton Paisner, said there was likely to be a race for the two parties to get their files in to the European Commission to be assessed. "Maybe one will get through and one won't," he added.

The key issue is whether a merged entity would acquire sufficient market power to be able to raise prices above the competitive level. Analysts said the severe competition from budget airlines was likely to be taken into account. "A merged group would be less likely to be able to raise prices due to competition from independent holidaymakers," one said. "If it did so, holidaymakers would simply look elsewhere."

David Pope, an analyst at Brewin Dolphin, said cost synergies from a merger between First Choice and TUI's travel arm would be passed on to the consumer two or three years down the line. Chris Lee, head of travel business at Barclays, said the mergers were good news for the market. "There has been over-capacity in the market for a long time and consolidation was widely expected," he said.