COMMENT: The hole truth and nothing but?

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The Independent Online
Eurotunnel has turned the humble prospectus into such a work of fiction that shareholders could be forgiven for not believing a single word contained in its latest offering. Even the admission that Eurotunnel units "constitute a high-risk investment" is a model of Anglo-French understatement.

In 1987, when the tunnel was still little more than a twinkle in Sir Alastair Morton's eye and a small bore hole in Shakespeare Cliff, shareholders were promised a dividend in 1993. By 1990 the date of the first payout had slipped to 1998, by 1994 it had moved further out to 2003 (largely on account of the tunnel not being open). Now shareholders are being promised a dividend in 2006 if all goes well but more likely 2010 if the high-speed rail link encounters the same fate as the tunnel.

In reality, the projections are largely meaningless for the vast bulk of the company's 720,000 shareholders. Inflation will have long since eaten up any capital gain that a shareholder who boarded in 1987 might have hoped to realise. The only purpose in hanging onto the stock is for the free travel perks. Now they face a choice between savage dilution on the one hand and oblivion on the other. The prospectus that will start landing on doormats in the next few days is novel in that Eurotunnel is not proposing to raise any new money but rather hand out new shares to its bankers in return for cancellation of debt.

Eurotunnel needs to persuade the equity markets that its latest projections are not only plausible but probable for two reasons. First, if existing shareholders vote down the restructuring then Eurotunnel will go into insolvency. Second, if Eurotunnel's share price fails to recover then the warrants it is about to issue will remain worthless. Unless they are exercised then Eurotunnel is consigned to handing over ownership of the project to the banks anyway at just the point when the project starts to turn from albatross around neck to licence to print money.

There is one other snag. The restructuring also needs the support of 100 per cent of Eurotunnel's banks to succeed. Previous financial rescues - such as those of News Corp and GPA - show that even tiny banks can punch way beyond their weight in such circumstances. By clearing out 51 of the stragglers and bringing in a handful of big US banks, the agent banks, led by NatWest and the Midland here have made it less likely that Eurotunnel will be held to ransom.

The only other party that needs to be brought on board are the British and French governments, which are being asked to extend Eurotunnel's concession to 99 years. Provided that is forthcoming, the betting is that shareholders will support the deal. The biggest obstacle then becomes investor apathy. A quarter of shareholders need to show up in Paris in July to get the deal waved through. With 563,000 French shareholders controlling 54 per cent of the stock, that may prove the most difficult task of all.