The merger between Thomas Cook and MyTravel took the trade and analysts by surprise despite months of speculation about consolidation among the UK’s big four travel groups.
In truth, the possibility might have been foreseen since, amid all the speculation, the pair were the only companies to have identified themselves clearly as seeking consolidation.
MyTravel had announced its interest in First Choice and Thomas Cook group chief executive Manny Fontenla-Novoa said only last week: “We are in very good shape to take part in consolidation. The big four can only handle the future as they are with difficulty.”
By contrast, TUI had ruled itself out of a deal and First Choice had refused to say more than that it was considering its options.
Speculation about an auction for First Choice’s mainstream business between Thomas Cook and MyTravel was probably misplaced. MyTravel would have struggled to find the money and it is questionable whether First Choice would have sold a core part of its business including its airline and web business.
The proposed deal will merge the Thomas Cook group’s 33 tour operating brands, 2,400 travel agencies, 66 aircraft and almost 20,000 staff across Europe with MyTravel’s 17 brands, 31 aircraft and 13,000 staff in Europe and North America.
Thomas Cook and MyTravel make a decent fit. They would form the market leader in the UK in terms of package holiday volumes and retail outlets. Thomas Cook is the number two in Germany and holds leading positions in Belgium and the Netherlands; MyTravel is a major player in Scandinavia and North America.
The UK and German markets are key – the German because it is Europe’s biggest and the UK because it is currently the most profitable. Thomas Cook sold more holidays in Germany than the UK last year, but made higher profits here.
The pair also fit in terms of strategy, both retaining a core commitment to traditional packages. Fontenla-Novoa said last week: “Everyone’s talking about the death of the package, but it remains profitable.”
Of its rivals, TUI has forecast a rapid move to depackage products and First Choice has concentrated on specialist and long-haul.
“First Choice is increasingly moving into the long haul market,” wrote Travolution editor Kevin May on our sister title’s blog. “Thomson will be counterbalancing the drop in pre-packaged sales by actively pushing its new strategy of uber-dynamic packaging.”
But what has driven the deal is overcapacity. The pressure was intensified by the difficulties of last summer when overall package sales fell.
That posed a particular problem for MyTravel, which has fought to return to profit since financial problems in 2002 and 2003. It again failed to make an operating profit in the UK last year, but reported the group was back in the black for the first time since 2001.
MyTravel’s survival has driven consolidation. Rivals had anticipated its disappearance, and its re-emergence turned the screw.
The Thomas Cook/MyTravel deal was described as a merger, but it is difficult to escape the conclusion it represents a takeover by Thomas Cook, which will own a controlling share and supply the chairman, chief executive, chief financial officer and name.
However, the MyTravel shareholders – largely a group of banks and finance houses – will be happy as they will own 48% of the merged group despite contributing one-third of its revenue.
MyTravel chief executive Peter McHugh retires in December with his job done – the group survived and the banks do not have to write off their investment.
But mergers have been presented as done deals in the past only to encounter problems. One analyst suggested: “Everyone is making assumptions, but you don’t know how things will look until a deal is done and it isn’t yet.”
However, the deal appears unlikely to be vetoed by regulators, given that the new group’s one significant market-leading position will be in UK package sales.
Five years ago that would have posed a problem, but with packages now accounting for about 40% of overseas holiday sales in the UK, regulators may consider the group’s overall market share of perhaps 14% permissible.
The joint company will be called the Thomas Cook Group, based in the UK and listed on the London Stock Exchange. It will be owned 52% by Thomas Cook’s owner KarstadtQuelle and 48% by MyTravel’s shareholders.
The merger is predicted to save £75 million a year by 2009/10 through cuts in duplicated services and assets including staff, shops, aircraft, offices and IT systems, particularly in the UK.
A completion date has been set for June, depending on the approval of MyTravel shareholders, completion of KarstadtQuelle’s deal to buy the 50% of Thomas Cook still owned by Lufthansa, and regulatory approval in the UK and Brussels.
– Read a roundup of how commentators responded to the Thomas Cook – MyTravel merger on the Travel Weekly Blog
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