NO ONE seems to have told Peter Long that acquisition-led expansion does not usually work. The chief executive of First Choice Holidays has made 40 acquisitions in the past five years, a dozen of them in the past year and yesterday he announced two more.

He is paying £54 million in cash for Grand Expeditions, which offers yacht chartering, escorted cultural holidays, private jet breaks and other vacations to well-heeled Americans. Another £37 million is being forked out for Intrav, a similar business.

Mr Long’s philosophy is this. Use cash thrown off by the traditional part of the business — flying planeloads of sunseekers to the costas and Florida — to finance purchases of specialist holiday operators for more adventurous souls.

Increasingly, holidaymakers want to do more than lie on the beach. The fast growth and fat margins are to be had from educational cruises, nature treks and expeditions to exotic spots such as the Antarctic and the top of Kilimanjaro.

There is no doubt that the demand is there. But is First Choice paying too much? The cost of Grand Expeditions was a hefty 42 times after-tax earnings. That sounds very high. But Long argues that this acquisition, like others before it, makes sense because of the huge savings made by subsuming a small, independent operator into a larger group. Duplicated overheads, such as marketing and IT, can be stripped out and the buying clout of an organisation that purchases accommodation and transport on behalf of five million Britons a year can be marshalled. In the case of Grand Expeditions, First Choice is confident of squeezing out at least £4.5 million a year in synergies.

By making small purchases, First Choice never bets the farm. And the subsectors it is expanding into tend to be extremely fragmented, promising big returns for a big fish able to act as consolidator.

So far the model has worked very well. First Choice has produced double-digit earnings and dividend growth for three years and the company is brimming with confidence. Investors are nervous about the consumer downturn. But so far Long cannot see any impact. People may be cutting back on their shopping but they regard holidays as sacrosanct. At 218.75p a share, First Choice trades on a prospective multiple of 13.7 and yields 3.5 per cent. This is not a low-risk share but the strategy is proving itself. Buy.

Melrose Resources

MELROSE RESOURCES, the oil and gas explorer, received a share market drubbing yesterday. Active in Bulgaria and Egypt, the company released an update that showed failure and success. The market, unfortunately for Melrose, focused on the failure and drove the company’s shares down as much as 7 per cent before a modest recovery in afternoon trading to 337¾p.

The disappointment was in Bulgaria, in shallow Black Sea waters. Although Melrose discovered traces of hydrocarbons, they were insufficient in value and will force the company to head further offshore for future drilling. The drilling programme confirmed the presence of a hydrocarbon system that could become more significant in deeper waters, at higher cost but potentially lower risk.

Melrose was more successful with its onshore exploration wells in Egypt. West Khilala-1 has struck gas, suggesting a field of up to 175 billion cubic feet of proven and probable reserves. Its Turbay well needs more appraisal but early estimates have suggested a flow-rate of 1,000 barrels of oil a day. Modest, but oil sells even in the smallest quantities.

Melrose is like most of the UK’s bigger independent oil and gas companies. It has built a modest, cash-generating portfolio of producing wells in Bulgaria, Egypt and America, the funds from which it funnels into exploration.

Melrose’s proved and probable reserves stand at 47.8 million barrels of oil-equivalent, taking no account of yesterday’s update. One of the company’s house brokers has slapped a 321p per share valuation on these reserves alone. This suggests that the market is factoring in very little for Melrose’s potential to deliver future finds.

The company made pre-tax profits last year of £10.4 million and managed to pay a token dividend. It is on course to deliver about £19 million for the calendar year and perhaps £26 million next year, assuming no change in the crude price.

The industry is a fickle one and is as quick to reward success as it is to cull those who fail. The existing reserves should help to underpin the share price. Buy.

Protherics

SOME things are worth the wait, as Protherics, the biotech company best known for its snakebite antidotes, proved yesterday. Shares in the fledgeling drug developer jumped 44 per cent to 81.5p on news that the company has finally found a partner to fund the final development of CytoFab, a promising treatment for sepsis.

That AstraZeneca, Europe’s third-biggest drugs maker, has chosen to make CytoFab the linchpin of a new £1 billion push into medicines for infectious diseases is testament to the quality of Protherics’ science. AstraZeneca will probably spend at least £250 million on this medicine alone over the next three years and its fortunes will be closely linked to that of David Brennan, the incoming chief executive, who has vowed to bolster a weak pipeline of new products with new strategic alliances.

News on the development of CytoFab will dominate Protherics’ share price for the next three years. But if the medicine makes it to the pharmacy shelves, and it is still a big if, AZ will have an $8 billion market pretty much to itself. Buy.

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