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TUI's Travel Unit to Merge with First Choice

Germany's TUI unveiled a tie-up of its tourism unit with Britain's First Choice on Monday to boost its position as Europe's biggest travel firm in the face of new challenges from merging rivals.

The TUI-First Choice merger will create a tourism group with revenues of about 12 billion pounds ($23.4 billion).

The two firms said the new company, TUI Travel, will be headquartered and listed in London and will be 51% owned by TUI and 49% owned by the shareholders of First Choice.

The merger comes about a month after Thomas Cook, Europe's second-biggest travel firm, with sales of 12 billion euros, bought British rival MyTravel instead of opting to purchase First Choice.

TUI, which also has a major shipping division, plans to hold a news conference in Hamburg to give details of the merger and also its 2006 results.

TUI shares were up 9.6% at 18.10 euros ($23.89), the leading gainer on the blue-chip DAX index, which was up around 1%. First Choice shares were suspended in early trade.

Europe's package-holiday sector is suffering from oversupply, prompting top players to look at mergers to cut costs and squeeze rivals.

First Choice said the merged company, with 27 million customers in 20 markets, would deliver annual cost benefits of at least 100 million pounds before tax, to be fully realized within three years of completion.

The merger, which needs the approval of First Choice shareholders and antitrust authorities, should be completed in the third quarter of 2007.

"The strong strategic fit of the businesses combined with a leading management team provides the opportunity to create one of the world's most profitable travel groups by delivering sustainable revenue and long-term earnings growth while deriving cost advantage," First Choice said in a statement.

Analysts welcomed the deal but warned that TUI still needed to work on its margins.

"The question remains whether TUI can achieve solid margins in the tourism business in the medium term," said Nils Lesser, an analyst at Merck Finck in Frankfurt.

TUI said it will contribute about 875 million euros of net financial debt to the new group, including all pension liabilities currently associated with TUI Travel.