£1.8bn Thomson deal creates a holiday giant

Concern about the effect on smaller firms as Preussag realises ambition of creating the biggest package operator in Europe

Britain's biggest holiday operator is expected to be sold to a German conglomerate after the directors of Thomson Travel agreed to recommend a takeover bid yesterday.

The £1.8bn offer from Preussag would create the largest holiday company in Europe. Last night industry experts said tourists would not be affected immediately by the deal. But they said prices could eventually rise as the biggest firms started to increasingly dominate the market and squeeze out smaller operators. "In the short term it would be wrong to think that suddenly holidaymakers are going to get cheaper or more expensive rooms and flights," said Jeremy Skidmore, editor of Travel Weekly.

"Long term there is more of an issue. Bigger companies are getting bigger across Europe. It's all about better deals that they can get on rooms and aviation fuel. Margins are tight and the bigger you are the better deals you can get."

The Association of Independent Tour Operators said it was concerned at the likely effect on smaller firms. John Bennett, the chairman, said there was "an ongoing concern about a number of issues" related to the strength of the big four operators. The expected deal comes after a period of frantic speculation within the package holiday market - a market that would be drastically altered if the deal goes through.

A takeover of Thomson had been expected for months, partly because its launch share price of £1.70 had slumped since its 1998 flotation. Original shareholders, who are given a 10 per cent discount on Thomson holidays, were told yesterday the perk would be maintained by the new owner.

The company was founded by the media tycoon Lord Thomson of Fleet in 1965 and now holds 24 per cent of the UK market, which made it attractive to Preussag's domestic rivals, C&N. That firm first offered £1.3bn, then £1.45bn, but both bids were rejected by the Thomson board. A third offer of £1.6bn, or £1.60 a share, brought the two sides back to the table this month.

The negotiations were hijacked by the bid from Preussag, which owns the holding stake in Thomas Cook, the third-placed company in the British holiday market behind Thomson and Airtours and ahead of First Choice.

Charles Gurassa, chief executive of Thomson Travel, said yesterday: "The board is unanimous in the view that this offer represents fair value for the business. Thomson's strong brands and market positions complement Preussag's own portfolio. It's a great fit."

Observers said the deal, which would require Preussag to sell its stake in Thomas Cook under monopoly legislation, marks a trend within the holiday industry towards cross-European expansion.

At the moment there are three main European markets for package holidays - Germany, Britain and Scandinavia. Preussag's purchase of the Thomson portfolio would give it control of the Scandinavian holiday firm Fritids Resor.

If the takeover succeeds, the thwarted C&N or the Swiss firm Kuoni may step in and buy Preussag's 50.1 per cent share in Thomas Cook. To complicate the position further, there are suggestions that Preussag may initially buy a further 22 per cent of Thomas Cook, giving it a total of more than 72 per cent, creating a more attractive prospect to a potential buyer.

Mr Skidmore said: "It's not a declining market. Practically everyone you know goes on holiday or wants to go on holiday. We get very emotive about the Germans but I don't think that people are going to be bothered by the fact that the company are German."

Preussag's chief executive, Michael Frenzel said: "The acquisition of Thomson Travel is an important step towards Preussag's goal."

Last night Susan Knorre, Preussag's spokeswoman, said the group was very similar to Thomson in terms of quality, hotels and destinations. She also said there were no fears than xenophobic Britons would be put off going on holiday with a German company. "People here are aware of the jokes," she said. "We understand the British humour more than you might think."