City & Business: Seismic struggle moves the earth at Eurotunnel

CITY rows are normally very private affairs conducted in smoke-filled rooms behind tightly closed doors. Rarely do they see the light of day; it's generally judged to be in no one's commercial interest that they should. Just occasionally, however, like a seemingly dormant volcano, they explode into the open. One of them is in the process of doing so right now - a humdinger of a row over Swiss Bank Corporation's involvement in Eurotunnel's planned pounds 750m rights issue.

In some respects this was a very predictable dispute. After all, it has brought together some highly explosive ingredients: Sir Alastair Morton, famous for being stubborn and rowing with almost anyone who comes his way - sometimes in extreme, profane and vitriolic terms; and Swiss Bank, which is attempting to bulldoze its way into the closed-shop environment of London's new issues market using a potent mixture of aggression, innovation and focused determination. When an immovable object meets an irresistible force, there are bound to be explosions. The circumstances bear some elaboration.

At the turn of the year, Transmanche Link (TML), the Channel tunnel contracting consortium, approached Swiss Bank and asked whether it could help settle TML's long-running dispute with Eurotunnel over costs. It was plainly in neither party's interest that the dispute should end up in court; the only beneficiaries would have been the lawyers. Eurotunnel, with a big rights issue looming and completion of the tunnel in sight, was keen to settle too. Swiss Bank was in many respects a natural for TML; it has long had a dialogue with Neville Simms, who is chairman of both TML and one of its key constituents, Tarmac. Swiss Bank also helped salvage a rescue rights issue for another TML member, Costain, and backed its chief executive, Peter Costain, against City calls for his resignation.

Mr Simms wanted more than pounds 100m in full and final settlement; the problem was that Eurotunnel didn't have the money. Swiss Bank therefore came up with a scheme under which TML would be paid in Eurotunnel shares. These would be hedged by Swiss Bank in the derivatives markets in a way that would guarantee TML eventual cash settlement. Swiss Bank has long claimed that using this method, it can raise capital for companies for a lot less than traditional houses charge on a conventional rights issue.

It proved unacceptable; Eurotunnel insisted the figure was far too high, and anyway it thought the Swiss Bank scheme unworkable. The negotiation ebbed and flowed until eventually it was agreed that TML, through Swiss Bank, would underwrite up to pounds 80m of the forthcoming rights issue which would be earmarked for final settlement. There was, however, an important proviso. TML insisted that Swiss Bank should become a joint manager of the main pounds 750m rights issue alongside Eurotunnel's established advisers - SG Warburg, Banque Indosuez and Morgan Grenfell.

SIR ALASTAIR and Warburgs saw red. Swiss Bank was perceived to have a gigantic conflict of interest; the idea of TML's financial advisers rifling through Eurotunnel's books as part of the rights issue due diligence was anathema. TML has long been seen by Sir Alastair as an enemy - a bunch of marauding, thieving contractors intent only on taking Eurotunnel for a ride. There were other concerns too. Warburgs has given Sir Alastair years of loyal and highly effective service. Where others would surely have failed, Warburgs has managed to keep the project going. To strip it of its pre-eminent role at such a late stage and allow Swiss Bank to take at least some of the glory seemed unfair and disloyal. When facing a walking on the water exercise like Eurotunnel's pounds 750m cash call, it doesn't do to upset such a powerful house; Sir Alastair needs all the help he can get.

Personalities also played a part. It is hard to imagine that Sir Alastair could have resented Rodolfo Bogni, the charming and highly sophisticated international banker who runs Swiss Bank's London operation. But Brian Keelan, the man in charge of the TML account, he certainly did. Mr Keelan is characterised as the City equivalent of football's Vinny Jones, a player who fouls for the sake of it and leaves a trail of destruction in his wake. Sir Alastair thinks of Mr Keelan as a rogue wolf.

The truth is rather different, however. Far from being a loose cannon, Mr Keelan's approach is authorised from the highest levels within Swiss Bank as part of a deliberate strategy to break into the London market (see opposite). Ironically it is the sort of irreverent, iconoclastic and combative approach Sir Alastair would by temperament be sympathetic to. But then Swiss Bank, once identified with the old enemy, TML, was never going to be looked on kindly.

Some also see Swiss Bank's aggressive assault on the market as reminiscent of Morgan Grenfell in the mid- 1980s. Here too was a bank prepared to go to almost any lengths to reach the top of the corporate finance league; anything went provided it was perceived to be in the interests of the client. In Morgan Grenfell's case, hubris met its nemesis in the Guinness affair. There's no sign of such a calamity in the making at Swiss Bank, but there is a growing number in the City prepared to predict a similar fate. There have been at least two complaints to the regulatory authorities about Swiss Bank's behaviour over the past year, though significantly, nothing came of either of them. When you are treading on toes, it's easy to make enemies.

BUT BACK to the row, which by Wednesday had reached near farcical levels. LBC radio reported that Warburgs was so furious at being elbowed out by Swiss Bank that it was threatening to resign as broker to Eurotunnel. The report was inaccurate but it is a measure of the heat of the situation that it was broadcast at all. With Warburgs now demanding both loyalty and retribution, Sir Alastair seized on remarks made by Mr Keelan about the timing and size of the rights issue. Mr Keelan, he insisted, had not been authorised to make these statements, which in any case were incorrect. Swiss Bank agreed, he claimed, and had in effect disowned Mr Keelan.

As the morning progressed, however, it became clear that far from disowning him, Swiss Bank stood full square behind their man. It wasn't true that Mr Keelan had been fired or been forced to flee the country, Swiss Bank had to insist. In fact he had merely gone on holiday, blissfully unaware of the fury he was leaving behind. He's sunning himself in Positano, southern Italy at this very moment.

This was the point at which everyone collectively seemed to decide to cool it. Sir Alastair began to claim that as far as he was concerned, the row was over; it was in any case much more in the nature of a squall than a full-blown storm. Swiss Bank too was keen to calm the waters; Eurotunnel, after all, is now a client and if the bank values its future in the City, it cannot really be seen to be upsetting a client. And finally Warburgs was keen to present the whole thing as no more than part of the cut and thrust of ordinary commerce. Well maybe in the end that's all it was, but most of us would be forgiven for forming the impression that the stakes are rather higher than that. I suspect we'll be hearing a lot more of Swiss Bank over the years ahead.