City & Business: Eurotunnel struggling to pull off pounds 750m rights

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The Independent Online
SOMETIME soon, probably this week, Eurotunnel is going to launch a big rights issue. Preparations have been under way for several months and there's been plenty of warning. Sir Alastair Morton, chief executive, has been talking about it for nearly a year; and bankers have publicly made plain they are not prepared to refinance the project unless shareholders, too, bear some of the pain of the delays and cost overruns on the Channel tunnel. What is not fully appreciated, however, is the size of the issue. It's going to be a good pounds 250m more than the pounds 500m anticipated in the stock market, making it easily the largest cash call of the present overly crowded season.

In any circumstances this would be a tall order. Set against a backdrop of extreme unease in world equity markets - Nick Knight of Nomura revised his near-term forecast for the FT-SE 100 index to 2,800 on Thursday - and further delays in the establishment of full shuttle, passenger and freight rail services through the tunnel, it assumes near-impossible proportions.

Eurotunnel has always been a 'jam tomorrow' project in investment terms; shareholders know they carry more than the usual risk; that the tunnel could as easily turn into another Euro Disney as the cash cow Sir Alastair confidently predicts - many say a good deal more easily.

To date, however, hope has always triumphed over experience. Somehow or other, Sir Alastair with his combative, abrasive style, manages to keep the show on the road. Repeated escalations in cost, highly public battles with contractors and bankers, seemingly insurmountable technical difficulties - Eurotunnel lurches precariously from one crisis to the next but seems to survive them all. Like some irrepressible optimist, the project bounces back from every disappointment. It refuses to be laid low.

Now there's a new setback - a delay in the start of full shuttle services until September at the earliest. The pressing question for the City, as final preparations are made for the pounds 750m rights, is whether this latest disappointment can also be weathered. Even for a venture of Eurotunnel's resilience, is this not one blow too many? Despite Sir Alastair's public protestations that nothing has really changed, that there was always going to be a slow build-up, a determination to get everything running smoothly before full service is established, it is plain that the latest delay amounts to a new and quite profound let-down for bankers and shareholders. The financial consequences are severe: the loss of high-season tourist traffic will cost Eurotunnel at least pounds 100m in revenue.

It means a further lengthy period in which Eurotunnel's mountain of debt will have to be carried without revenues to sustain it. Some pounds 250m of the rights proceeds are earmarked for final settlement of Eurotunnel's long-running dispute with contractors over costs. Even so, it's a kind of double whammy that shareholders are being required to take. First, they have to come to terms with the psychological impact of the new delay, which is bound to hit Eurotunnel shares when they open on Tuesday. Second, they are going to have to pay for it; a much larger rights issue is now required than previously anticipated.

It's no wonder that SG Warburg and Morgan Grenfell, Eurotunnel's two established British merchant bank advisers, have been struggling with the immensity of the task they face. There's talk of them having to bring in others to help with the core underwriting, such is the reluctance of shareholders and other potential sub underwriting institutions to take on more Eurotunnel paper. To the outside world Warburg's stance is still strongly bullish, but then it would have to be; privately, the bank is as worried as everyone else that Eurotunnel will end up going the same way as Euro Disney, buried under a sea of debt it is able neither to finance nor repay.

Still, where there's a will there's a way. Sir Alastair's has always been of the iron variety, though he's said to have tired hugely of late (who wouldn't). Nothing is yet signed and sealed but my guess is that by hook or by crook, Sir Alastair will secure the necessary backing. In the end the City has no option but to cough up. If it doesn't, bankers will call in receivers and Eurotunnel shareholders will lose everything. The rights may end up flopping but the underwriting will be secure; Eurotunnel will get the funds necessary to keep the show rolling. That'll be Sir Alastair's cue to take a back seat. A new chief executive is due to start shortly and Sir Alastair will step up to the figurehead position of joint chairman. Let's hope the reality of this extraordinary venture lives up to the heady claims he's always made for it. (Is it delusion or vision? It's always been hard to tell). It would be an awful shame if all that unbounded optimism proved misplaced.

Cascade in control

ACCORDING to a recent study by SG Warburg's Paris office, shares in LVMH, the giant French luxury goods company with a 20 per cent stake in Guinness, are undervalued compared with its competitors by between 20 and 25 per cent. There are all kinds of reasons for this but chief among them, I suspect, is LVMH's structure of ownership; a complex cascade of interlocking companies. During one of his recent visits to London I asked Bernard Arnault, head of LVMH, what the point of this structure was. With breathtaking candour, he said it was perfectly simple; it was so that he and his senior managers could exercise and safeguard financial control from a very limited capital base. It is a mark of the differences between the French and Anglo- Saxon approach that he couldn't see anything wrong in this.

The cascade structure works something like this. A hierarchy of companies is established, each owning a controlling shareholding in the next down the line. Through a master company, Mr Arnault is thus able to control LVMH even though he ultimately owns quite a small proportion of its capital. Such structures, Mr Arnault insists, are relatively common in France but to the Anglo-Saxon mind they are an anathema - seen as wide open to the sort of abuse identified with Robert Maxwell.

Mr Arnault is at this very moment engaged in a transaction that has many Maxwell hallmarks; he's transferring assets from one part of the empire to another, from Christian Dior and Au Bon Marche to LVMH. An independent valuation is being used, but even so you always have to wonder in circumstances like these whether the transaction is not more in the interests of the business empire than of the receiving company.

In Mr Arnault you could not, in fact, find a businessman more unlike Mr Maxwell; he's sophisticated, sharp and artistic (he plays the piano to concert standards). His business empire is highly successful and growing - at 15 per cent per annum in luggage and perfumes. He also gives a very convincing justification of the cascade structure, which he claims disadvantages outside shareholders no more than any conventional Anglo-Saxon structure.

He may well be right, but somehow I doubt Mr Arnault is going to convince the international investors he's currently trying to woo. His aim is twofold: to reduce the discount identified by Warburg and others, and to help with a big rights issue he needs at Christian Dior. Despite the success of his businesses it will be an uphill struggle. International investors remain deeply suspicious.