TUI Travel flying high after approach from TUI AG - UPDATE

London-listed leisure travel company TUI Travel raced ahead of Wednesday afternoon after the firm confirmed that it has been approached by its German parent company, TUI AG, about a merger.

"The Independent Directors of TUI Travel have recently received an approach from TUI AG which may or may not result in a combination of the two companies," the company announced.

Shortly after the announcement, the shares, which opened today's session at 281p, surged 7.32% to 302p by 15:22.

TUI Travel was formed back in September 2007 after First Choice Holidays merged with TUI AG's travel and tourism division. TUI AG owns 56.4% of the UK company.

Sources had told Reuters earlier in the day that one of the possible "combinations" would be for TUI Travel to buy out TUI AG in an attempt to create synergies between the two groups. However, this - described as a 'reverse takeover' - was later denied by the UK-listed company.

TUI Travel said: "Discussions are at a very early stage, but are on the basis that any such combination, if effected, would be achieved not by a reverse takeover but by means of a nil premium all-share merger."

While TUI AG already owns a majority stake in TUI Travel, it is thought not to have the funds to buy the remaining 43.6% interest that it does not own, these sources told Reuters.

"Far from straightforward"Analysts at Jefferies responded to the news, saying that the transaction, if any, is "likely to be far from straightforward, the benefits to TUI Travel shareholders unclear and with the risk that the highly rated TUI Travel management is not involved in the new company".

They pointed out while TUI AG has a big stake in TUI Travel, the parent's market capitalisation is less than 40%.

"While we believe there could be some synergies, notably a c€50m HQ cost at TUI AG and that there are tax losses to be exploited, we think these could be difficult and costly to realise.

"We also struggle to see why the largely UK shareholder base would want to dilute their equity in the pure play tour operations of TUI Travel, which rose over 70% in the last year, through a nil-premium merger with German-listed conglomerate TUI AG."