Light at the end of the Channel Tunnel

After 23 years Eurotunnel will this year pay its first dividend. Once a financial basket case, the tunnel is now turning a decent profit at last
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A phoenix rising from the ashes, the light at the end of the tunnel, the rainbow after the storm – Eurotunnel's announcement yesterday that it is finally going to pay its shareholders a dividend merits every possible cliché of renewal.

After more than 20 years of delays, debacle and refinancing plans – culminating in a massive restructuring operation that wrote off £3.4bn of debts and cut shareholder stock to just 13 per cent – the company running the 30-mile undersea road and rail link is finally paying its long- suffering investors a dividend of 4 euro cents (3.6p) per share.

Financial results for 2008, published yesterday, show stellar progress from the company's first ever profit, of just €1m (£890,000), in 2007, to net profits of €40m last year. And that despite the most severe fire in the tunnel's history knocking out half the tunnel's capacity for five months and dragging down revenues from €718m to €704m. Jacques Gounon, the Eurotunnel chief executive, said: "This is a new position for us, but we pursued a tough financial restructuring and we have done good business, so for the 15th anniversary of the inauguration of the tunnel we can celebrate with the first dividend for shareholders."

As little as 18 months ago, after more than a decade of unsuccessful attempts to address its problems, the group was languishing in the French equivalent of bankruptcy protection, dividend payments little better than a dream. Now, even with the fire, Eurotunnel is riding high as so much of the rest of the economy is nosediving.

Last year's two capital-raising exercises were, unlike their multiple predecessors, not the result of financial difficulties. Rather, they were an attempt to capitalise on the company's new found profitability. The €1.7bn raised has been used to pay down some of the forest of warrants and loan notes issued in the grand restructuring that cut the company's debt from £6.2bn to "just" £2.8bn at a stroke in 2007.

By buying back loans due to convert into cash in 2010, the company saved €68m, M. Gounon said. The money was also used to prevent the issue of 3.9 million shares, about a sixth of the total. Financial solvency also means that the warrants issued to the original shareholders alongside the new stock may even be redeemed early.

The credit crunch may even work in the recovering company's favour. It is already raising interesting possibilities with regards to the US banks, pensions and hedge funds that were some of Eurotunnel's biggest creditors, and now hold sheaves of its paper. "It seems that the lack of liquidity for these US creditors is worse than that in the EU and we may be able to buy back the loan notes at below the face value," M. Gounon said.

Eurotunnel's path to reinvention has been long and tortuous. The trouble started almost as soon as the company was formed in 1986. Delays and disputes with contractors pushed the tunnel's opening date from May 1993 to November 1994, and the cost ballooned from £4.7bn to £9.5bn, of which an eye-watering £8bn was debt.

Once the tunnel opened, the problems got worse. With such vast debts, the need for cash was even higher than expected. But although the predictions for car and lorry traffic were broadly accurate, the expectations for rail passenger and freight figures proved vastly inflated. In its first year of operation Eurotunnel made a £925m loss, and in 2003 it was admitted that the projections had never been believed but were necessary to get the tunnel built.

For more than a decade, despite multiple capital raisings to help meet bruising interest payments, the company was barely solvent. In April 2004, at a rambunctious meeting, shareholders finally rebelled, calling for all debts to be cancelled and ousting the chief executive Richard Shirrefs, with charges that he was too friendly to the group's creditors. Mr Shirrefs was replaced first with Jean-Louis Raymond and, on his resignation a few months later, by M. Gounon in February 2005. The latter's early statements that "a good part of the debt should be purely wiped out", gained little credit in the City. But his massive debt-for-equity restructuring scheme was forced through using France's Procedure de Sauvegarde to compel the 900 bickering creditors, and many tens of thousands of shareholders, to toe the line. The choice was to agree, or see the company bankrupt.

In May 2007, some 87 per cent of shareholders said yes to the plan, tendering their stock in the two companies – one British, one French – that were the old Eurotunnel, for conversion into shares in a new, entirely French "Groupe Eurotunnel". The scheme paid off all senior debt in full, with remaining creditors given shares in a £1.275bn convertible bond, of which £787m was convertible over five years at a 40 per cent premium. Initially, the total shareholder stake was diluted down to just 13 per cent by the scheme, although a warrant issued alongside the new shares, exercisable in 2011, could lift the equity stake to 24 per cent. With the buy-back schemes now under way, the proportion could yet rise higher.

After such a history, Eurotunnel shareholders were unsurprisingly ebullient yesterday. "Wonders will never cease," Michael Stainer, the spokesman of a UK shareholder action group, said. "Good on M. Gounon – we were absolutely behind him in restructuring the company and it has paid off."

But the scale of the successes should not be overplayed simply by contrast with the woeful past. "It is almost impossible to say if Eurotunnel is out of the woods," Gert Zonneveld, at Panmure Gordon, said. "The dividend payment is more symbolic than anything else, and the company still has debt that is four times bigger than its annual revenues."

Gone but not forgotten: No free travel, no deal

Jacques Gounon, the Eurotunnel chief executive, may have mollified shareholders who fought to keep their travel perquisites – but the battle is not yet won.

The restructuring plan accepted by 87 per cent of shareholders in 2007 caused outrage among original British investors who stood to lose their right to free travel.

The 1,250-strong Eurotunnel Action Group (Etag), set up to defend the perk, scored a victory when the Takeover Panel ruled that holders of original shares needed only to refuse to convert them to retain their privileges.

But the issue has not gone for good. The newly created Groupe Eurotunnel still includes the British company –Eurotunnel plc – whose shares provide the perk. Attempts to simplify Eurotunnel's structure will mean renegotiating entitlements. Michael Stainer, Etag spokesman, said: "They can't eliminate that company without our agreement, and we'd want a deal on the travel rights."

Discussions were just starting when last September's fire put paid to all but the most immediate concerns. With the tunnel back to capacity, the debate is back on the agenda.