Biggest potential weakness seems like the ability for the merging party to strategically collapse districts such that two legislators from the opposing party are made to reside in the same district, creating a new district with no incumbent. Not all legislatures require that representatives live in the district, and there would be real trade-offs to doing so, but it would be a pretty powerful hammer to wield against up-and-coming opposition candidates.
It doesn't matter at the abstraction of proportional representation, but it potentially matters quite a bit when you get into the nitty-gritty of actual elections.
You're right that this method doesn't protect incumbents. However, protecting incumbency and avoiding open-seat elections isn't necessarily a bad thing, and could increase electoral competition in some places. Some states don't allow incumbency to be taken into account when redistricting already.
I gerrymandered during the define phase using classic packing / cracking strategies, such that I had 8 majority-B districts (2:3) and 2 majority-A districts (4:1 and 5:0), and unsurprisingly, the only districts I was able to combine that were majority-A were those that included the packed districts.
If the overall split was, say, 27:23 instead of 25:25 such that we could define 9 majority-B districts in the define phase, then I would only have been able to define a single majority-A district in the combine phase.
(And yes, all of these gerrymandered districts would be considered safe B seats, as one would expect with a 20% margin)
There are also potentially issues if the packed districts are geographically clustered -- we see this a lot in states with a single predominant urban center (e.g. Kansas, Minnesota, Kentucky). In those cases, you might be forced to combine multiple packed districts due to pathological maps. For instance, consider a map where a Democratic bastion is districted into concentric rings -- that satisfies the contiguity requirement, yet only the outermost district abuts any Democratic-minority districts.