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TUI AG, Europe's biggest tour operator, will buy First Choice Holidays Plc to fight competition from Internet bookings and discount airlines, mirroring a combination of two rivals last month.

 

Hanover, Germany-based TUI will merge its tourism business, excluding hotels, with Crawley, England-based First Choice, which has a market value of about 1.6 billion pounds (US$3 billion).

 

The companies said TUI, which also owns Hapag-Lloyd shipping line, will have 51 percent of TUI Travel Plc, which will be based in the UK and be run by First Choice Chief Executive Officer Peter Long, Bloomberg News said.

 

Last month, KarstadtQuelle AG agreed to combine its Thomas Cook AG division with MyTravel Group Plc last month.

 

TUI, which reported a full-year loss yesterday, scrapped its dividend last year after reducing profit forecasts and announcing 3,600 job cuts.

 

The transaction "could be a very good deal for both companies," said Martina Noss, an analyst at Norddeutsche Landesbank in Hanover. "They could pool their strengths. TUI has good package tours and First Choice is good in special tours. The rumors will remain about a possible split up" between TUI's shipping and tourism businesses, Noss said.

 

First Choice, Europe's fourth-largest vacation provider, is expanding into luxury holidays and activity trips to avoid direct competition from low-cost airlines.

 

The combined company, with 27 million customers in 20 countries, will have "cost competitiveness" as "huge amounts of business are taking place online," Long said in a conference call. The deal will cut costs before tax by at least 100 million pounds (US$194 million) a year, First Choice said. The Thomas Cook transaction thwarted First Choice's own attempt at a transaction with MyTravel.

 

TUI "has to improve the profitability of its tourism business," said Christian Hamann, an analyst at Hamburger Sparkasse in Hamburg. "First Choice is much more profitable."

 

TUI will also transfer about 875 million euros worth of debt, including all pension liabilities, to the new company.

 

TUI yesterday reported a 2006 loss of 847 million euros, compared with the 733.1-million-euro estimated loss in a Bloomberg analyst survey. The German company had a 764-million-euro one-time write down. TUI generates about half of its revenue from travel and the rest from shipping.

 

Travel stocks' valuations "don't seem particularly high, and there are few if any signs of a consumer recession in the UK or Europe," said Jacob de Tusch-Lec, who manages UK equities at Artemis Investment Management Ltd in London.

 

(Shanghai Daily March 22, 2007)