First Choice Holidays yesterday confirmed that it was in talks with a number of parties – including rival MyTravel – over the possible sale of its package holiday business, sending its shares to a new high.
Analysts said a deal was likely to be valued at, at least #500 million and would allow First Choice to develop its adventure and short-breaks businesses, while giving MyTravel plenty of scope for cost savings.
They also said a deal would have more chance of winning regulatory approval than a previous attempt by MyTravel's predecessor, Airtours, to buy First Choice in 1999, which was blocked by European competition authorities.
"The market has moved on. A lot of people do things for themselves and you've got a whole range of online travel agents in the market," said Panmure analyst Gert Zonneveld.
Package tour firms have been hit hard by competition from low-cost airlines and the internet, and MyTravel came close to collapsing under the weight of its debts in 2003.
First Choice has fared better than most by focusing on more profitable adventure holidays and short-breaks businesses.
"This would de-risk the business further," Mr Zonneveld said of the potential deal with MyTravel.
First Choice said in a statement: "Discussions with a number of parties are at a preliminary stage.
"However, there can be no certainty that any transaction will be forthcoming."
First Choice declined to name the other interested parties.
Analysts said they could include Europe's two biggest tourism groups, Germany's TUI and Thomas Cook, as well as Switzerland's Kuoni, which held unsuccessful merger talks with First Choice earlier this year.
Morgan Stanley analysts said a sector-average ratio of 13 times price-to-earnings would value First Choice's package tour business at #500 million.
But if MyTravel shared some of its expected cost savings and used up some of its tax losses, it could afford to pay nearer #700 million, they added.
MyTravel, which runs Going Places travel agents, said any offer for First Choice's package tour business would be in cash and funded through a mixture of new debt and equity.
It would also consider issuing equity to First Choice shareholders as part of the offer, it said.
"The MyTravel board believes that this is an opportunity which could deliver significant value to both First Choice and MyTravel shareholders given the value of potential synergies and other consolidation benefits," MyTravel said in its statement.
Meanwhile, Standard Life Investments – one of the largest shareholders in MyTravel – said that more consolidation among tour operators is "absolutely necessary" given the "fragile" economics of the business.
In comments which appeared to indicate support for a tie-up, SLI's investment director Euan Stirling said: "What the business needs is supply discipline, it needs a lot of flexibility in the way it can change its offering to consumers.
"And we've seen a bit of consolidation in the past few years but really there needs to be more and I think that's really the driver behind the moves."