Tour operators join EU merger train

Date: 03/06/1999

By Peter Chapman

IT'S that time of year again, when hordes of northern EU holidaymakers reach for their buckets and spades and prepare for their annual pilgrimage to the crowded beaches of the Mediterranean.

No sooner will many of them get home from their fortnight on the Costa del Sol or the Greek islands than they will be thumbing through the tour operators' glossy brochures and trying to decide on the destination for their next holiday. More people than ever before will be making plans for an all-inclusive week on the ski slopes of France, Austria or Italy to renew their faded summer suntans.

But it is not just the EU's tourists who are deciding where to go next.

There has been a flurry of activity in the massive British market, culminating in the attempted hostile take-over of package specialists First Choice by Airtours for €1.375 billion, to create the country's number one operator.

First Choice shareholders now face a choice between accepting this take-over deal or continuing to support an earlier 'friendly' bid from Swiss travel group and long-haul giant Kuoni.

Whatever they decide, industry experts are predicting a new wave of cross-border mergers and acquisitions between the big tour operators, currently battling with each other to grab an ever-bigger slice of the demand for summer and winter fun.

The trend began earlier this year with the take-over of the UK's Thomas Cook group by German steel conglomerate Preussag. Under the deal, Preussag - which has major travel industry holdings in Germany - increased its stake in the UK operator to 50% after buying 24.9% of the company from Westdeutsche Landesbank. Privately owned shareholder Carlson Companies also merged its British arm with Thomas Cook under the terms of the deal.

Michael East, a UK-based European travel industry analyst, says compelling reasons for consolidation are only just beginning to emerge as markets in northern EU member states come close to saturation level after years of growth.

" In the past, there has not been a great reason for consolidation because countries had four or five players. There was a lot of national growth and there are not a lot of obvious synergies," he said.

But now, claims East, the big package-holiday markets of Germany, the UK, Benelux and Scandinavia are reaching maturity, and firms need to buy rivals in order to grow and deliver bigger profits to shareholders.

The industry believes that streamlining IT booking systems in travel agencies is one key way to boost profits. Another is for the sector's giants to use their financial might to develop new markets away from the traditional Mediterranean destinations.

But the most powerful driving force behind consolidation, according to East, could turn out to be the shortage of hotel beds created by the ban on building new hotels in many Spanish resorts. This, he claims, means firms may have to buy rival companies in order to use their hotels in these locations.

The UK's market leader, Thomson, has already been squeezed out of many Spanish hotels after Preussag's German-based operator TUI promised to rent beds in its own hotels to its new acquisition Thomas Cook.

Analysts point to a clutch of big operators in Germany and the UK which are poised to board the merger train.

Companies to watch out for in the merger frenzy include Preussag, which is expected to continue its offensive after clinching its majority share-holding in Thomas Cook.

Thomson has also promised to spread its wings with acquisitions or merger deals outside the UK, after seeing its predominance in the British market come under threat.

Industry insiders say the future of Kuoni is firmly under the spotlight, amid signs that it is already casting around for another possible deal. Neckermann of Germany is also expected to be swept up in the amalgamation fever. "It is big, but has been left behind," explained one analyst.

The other key question is whether the wave of cross-border mergers will emerge unscathed when they are scrutinised by the EU's tough anti-trust watchdogs.

Acting Competition Commissioner Karel van Miert will have passed on the baton to his successor by the time most of these deals are struck. But his replacement at the helm of EU competition policy will have to assess whether the consolidation of the Union's holiday industry will lead to less choice and higher prices for holidaymakers.

Ventures involving Kuoni will almost certainly pose less of a competition threat than those centred on tie-ups between big tour operators in EU member states. "That is because it is Swiss, and it is already big outside of Europe," said one industry analyst.

But experts believe that the outlook may be gloomier for other companies vying to win anti-trust approval for their deals.

As the battle for control of the EU's beaches hots up, competition officials will be on their guard for any move which might be to the detriment of tourists.

TOURISM IN THE EU

Cross-border travel: the most popular destinations for EU travellers who opt to stay within the Union's borders.

This table shows which nationals make up the highest proportion of visitors to other EU countries (in %)

Source: Eurostat