The merger would also turn up the heat on arch-rival TUI,
Europe's number one travel group, analysts said.

MyTravel said in a statement that its board and the board of
Thomas Cook's parent company KarstadtQuelle "have agreed the terms of recommended merger of MyTravel and Thomas Cook."

In reality, the deal effectively constituted a takeover of
MyTravel by the German firm, since KarstadtQuelle would hold a
52-percent stake in the combined entity. No cash would need to change hands since MyTravel's shareholders will receive instead the other 48 percent of the combined company.

The new merged group, to be called Thomas Cook Group Plc and headquartered in London, would have combined annual sales of around 12 billion euros (15.6 billion dollars).

That would substantially narrow the gap on market leader TUI,
which generates around 14 billion euros in revenues each year from its tourism and travel operations.

The deal is expected to be completed June. It already has the blessing of MyTravel's board, who described the terms as "fair and reasonable" and who said they will recommend it to shareholders at an extraordinary general meeting.

Awaiting authorization

Nevertheless, the merger is still conditional on necessary regulatory approval, the approval of MyTravel shareholders and the completion of KarstadtQuelle's takeover of a 50-percent stake in Thomas Cook held by German airline Lufthansa.

And under the deal, no cash will change hands. Instead, MyTravel's shareholders would be given the other 48 percent of the combined company, the statement said. The new combined company was to be called Thomas Cook Group Plc and would be headquartered and listed in London.

It would have combined annual sales of around 12 billion euros (15.6 billion dollars), narrowing the gap on market leader TUI, which generates around 14 billion euros in revenues each year from its tourism and travel operations.

Taking over western Europe

The merged Thomas Cook group would have a leading position in Britain and Ireland, Germany, Scandinavia, the Benelux countries, France and Canada, MyTravel said.

The alliance would cut administration costs by "at least 75 million pounds" (112 million euros, 146 million dollars) each year. There would be a dual management team: the new Thomas Cook Group would have two chief executives, Peter McHugh, current CEO of MyTravel, and is counterpart of Thomas Cook, Manny Fontenla-Novoa.

Power sharing

KarstadtQuelle chief Thomas Middelhoff would be chairman and his deputy would be Michael Beckett, the current chairman of MyTravel. "Thomas Cook is a household name and the joining of the two groups will create an even stronger force in this highly competitive market," Beckett said.

Middelhoff said: "The merger of two such well-established industry players ... will achieve significant value creation for us as shareholders from this geographically diverse portfolio of companies. We look forward to being a long-term committed investor in the enlarged group."

Markets energized

The announcement sent MyTravel shares soaring on the London Stock Exchange, where they surged 26.47 percent to 301 pence in a slightly slower market, while shares in close rival First Choice plummeted 16.38 percent to 255.26 pence.

In Frankfurt, shares in KarstadtQuelle jumped 3.36 percent to 27.08 euros, while shares in arch-rival TUI were down 1.55 percent at 17.10 euros.

Analysts at Merrill Lynch said the deal would give Thomas Cook and MyTravel "an opportunity to consolidate in a declining market, but without the need to hand over cash or get involved in potentially expensive bidding battles."