THE management of both First Choice Holidays and Kuoni have keenly expressed their enthusiasm for their planned merger.
Phrases like ‘unique fit’, ‘two strong businesses with highly complementary products and a shared culture’ and ‘strategic vision’ have come rolling over the horizon. Down in the City, investors were not so sure.
The First Choice share price fell back 20p in the days following the announcement and the Kuoni share price in Switzerland has also retreated. First Choice shareholders had been hoping for a takeover offer, valuing their shares higher. Instead they were offered a merger without a share price premium.
Despite the declared interest in taking the long-term view, everybody likes a takeover where a buyer offers considerably above the current share price. In addition, both companies focused on the strategic benefits. They did not say much about the potential for profit improvement from merging the two companies and, remember, it’s the thought of profit potential that influences share prices.
In practice, there should be considerable opportunities from the merger. In the UK, most of Kuoni’s customers travel by scheduled airline and the rest by charter airline, but not on First Choice’s Air 2000.
Certainly some of these customers will in future travel on Air 2000 once it has moved to two-class configuration, with the more upmarket Kuoni clients in the superior seats.
First Choice’s expertise in flying was also a particular attraction for Kuoni in mainland Europe. In addition, the combined group can use Kuoni’s knowledge and relationship with agents in Europe to develop short-haul holidays. The combination of the two companies enables them to develop in a way they couldn’t on their own.
In the UK market, there was some nervousness that First Choice could be vulnerable to competitive pressure from the other big operators. As part of a financially stronger group, that threat lessens.
The merger also gives a broad product range and enhances the quality of the overall portfolio at a time when the trend leans towards better quality products.
Will there be a bid from someone else for First Choice? Preussag, through its involvement with Thomas Cook, will be watching, as indeed will Airtours and Thomson. There would be savings if any these were to acquire First Choice but they would have to pay up, and endure a Monopolies and Mergers Commission probe.