Uncertainty over First Choice rights

Feast and famine follow each other with alarming speed in the holiday business. The last time First Choice issued a profits warning was just over two years ago, when it was known as Owners Abroad. It came just four months after the group had fought off a bid from its rival, Airtours, and with a Takeover Panel investigation looming most of the directors resigned.

Not to be outdone, the new management issued its own warning yesterday but there the similarity ends - this time it has no intention of rolling over. The warning coincided with a rights issue which will fund three acquisitions and raise up to pounds 10m to strengthen the balance sheet and ensure the group meets the Civil Aviation Authority's margin requirements.

It is not surprising that Thomas Cook is not taking up its rights on its 21 per cent stake, even if it gives other investors pause for thought. The stake it took in 1993 served its purpose in blocking the Airtours bid but the hoped for commercial benefits failed to materialise. It is disappointing, however, that the shareholders of one of the acquired companies have all opted for cash rather than shares, even though they will stay with the business. They could have registered greater confidence in the deal by accepting a mixture.

It is anybody's guess whether the tour market will recover in the coming year. First Choice is forecasting roughly similar numbers for summer 1996, and relying on the reductions in capacity already announced by the three market leaders to raise the return on sales sharply. But the rights issue virtually guarantees all three companies will continue competing strongly for 1996. This is also an industry where capacity can be added back as quickly as it is cut.

Are the shares now cheap? The rights issue is priced 30 per cent below the price in the market last week, which was already close to the bottom end of the trading range over the past year.

There is a danger that some other holders will not take up their rights, however, and the suggestion that Thomas Cook will sell out in six months creates a nasty overhang.