Investec has reiterated its 'hold' recommendation for travel and leisure group TUI Travel (TT) after yesterday's announced 'approach' from parent TUI AG (AG), saying that completion of a potential deal looks unlikely.

The broker admitted that any combination of assets between the two companies is "strategically sensible" as they already work together on combining AG's hotel and cruise assets into TT's vacation itineraries.

Analyst James Hollins said: "The combination has been talked about for years and, in our view, a merger (as opposed to an AG acquisition of TT) would limit the need to immediately pay down outstanding convertibles that would be required after an AG takeover.

"It also negates the requirement for either group to fund an outright acquisition (AG currently owns c56% of TT) and the combined entity could still benefit from AG's considerable tax losses."

Nevertheless, Hollins foresees a number of uncertainties regarding a deal.

He highlighted that lack of "material" merger synergies - likely to be below the €500m mooted in the press - and has concerns about the management structure after the merger, saying that "industry legend" and TT Chief Executive Peter Long would like leave.

Hollins concluded: "The potential TT/AG corporate action has been a share price crutch for some time and we expect it to remain. However, with low deal likelihood and an 11x price-to-earnings multiple to FY13E, we retain our 'hold' and 270p price target on TT."

Shares were up 0.51% at 294p by 09:29 on Thursday.

BC

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