David Crossland, chairman of Airtours, has made a bold call. He is gambling that the deal will not be referred to the Monopolies and Mergers Commission. He is also testing the financial nerve of LTU, owner of Thomas Cook, and that of recalcitrant shareholders in Owners Abroad who do not want the proposed Thomas Cook link-up.
The MMC is the bigger gamble. Bringing together numbers two and three in most industries would be enough to ring alarm bells at the Office of Fair Trading. In an industry as high-profile as the holiday industry, where the public interest is so close to the surface, the temptation to hold an investigation must be irresistible.
The combined group would initially hold sway over 30 per cent of the tour operating market. Even after removing business overlaps the new company would end up with about a 27 per cent share.
But Airtours is confident that it can, if called upon, persuade the MMC to sanction the deal. It argues that a precedent was set when the authorities cleared Thomson, the market leader, to swallow Horizon, the number three operator, in 1989.
Airtours will also argue that overseas tours account for less than 40 per cent of holidays taken by UK residents. Therefore it would control less than 11 per cent of the overall holiday market.
Those two arguments, however, are not as clear-cut as they look. Horizon, despite its 11 per cent market share, was haemorrhaging cash and was in danger of being closed by its then owner, Bass. Owners Abroad is not going bust.
Since the Horizon deal the industry has largely abandoned all-out price wars, although discounting still plays a large role. The playing field has also shrunk through the demise of International Leisure, several charter airlines and some large regional holiday companies.
If Airtours does get the necessary runway clearance, however, shareholders in Owners are left with two choices - team up with either Airtours or Thomas Cook. In terms of value the offer from Airtours is too low, giving an exit multiple of little more than 9.5 times. Shareholders can do no worse than sit tight, forcing better terms. There is also an outside chance that Thomas Cook might make a counter-offer.
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