Michael Harrison's Outlook: Is there light at the end of the Tunnel at last? Don't bet your savings on it just yet

More of a pussycat than a Russian bear; Life after Standard demutualisation; Fingleton's newspaper ruling
Click to follow
The Independent Online

The civil engineering which went into building the Channel Tunnel was a piece of cake compared to the financial engineering which has been employed since to keep the enterprise afloat. Yesterday, the latest plan to pull Eurotunnel clear from under its crushing debt burden came blinking into the light. Was this the fifth or perhaps the sixth such attempt to rescue the tunnel? Frankly, most people have lost count since digging first began two decades ago.

The latest debt restructuring, courtesy of Goldman Sachs and the ubiquitous Macquarie Bank, is designed to simplify Eurotunnel's finances and corporate organisation. Who are they trying to kid? In place of the existing debt structure along with its senior debt, junior debt, participating loan notes and stabilisation notes (don't ask) comes a scarcely less byzantine arrangement involving a new French holding company with an English subsidiary which will issue mezzanine debt in addition to the new senior debt and tier 1A finance. On top of that come the new hybrid notes devised by Goldmans and MacBank which convert into equity along with warrants for shareholders.

Wrap a wet towel around your head and see if you can understand this extract from the press release: "Following the payment of a first coupon of 6 per cent to the holders of the Hybrid Notes, subject to available cash flow, an additional 3 per cent coupon shall be payable to holders of Hybrid Notes and a dividend of an amount equal to the amount of the additional coupon multiplied by the sum of the number of shares in issue divided by the number of shares to be issued upon conversion of the Hybrid Notes in issue at the date of payment of the additional coupon shall be payable to shareholders." Who dreams this stuff up?

Shorn of all the financialese, the rescue plan involves halving Eurotunnel's £6.2bn of debt so that it can service its borrowings. In return, shareholders are being asked to give up 87 per cent of their equity in the tunnel. The bond holders also take a Number One haircut, exchanging £1.9bn of bonds for £75m in cash.

Jacques Gounon, Eurotunnel's chairman, cheerily says the choice is between his rescue plan and bankruptcy, and reckons he is almost there. All he needs is a vote of shareholders and bondholders, and final agreement from his co-financiers - unless of course someone comes along and offers him a better deal in the meantime.

Will this latest rescue finally put the tunnel on a secure financial footing, enabling it to pay its way and, whisper it quietly, a dividend as well? M. Gounon says it will, but we have been here many times before only to discover that the light at the end of the tunnel was in fact an oncoming shuttle train (usually only a third full).

If this plan fails then there is only one answer left: paint the tunnel red, call in Bono get them to Drop the Debt.

More of a pussycat than a Russian bear

Into the bear-pit, otherwise known as the Hamilton Suite on the second floor of the Four Seasons hotel on Park Lane, where the Russian steel oligarch Alexey Mordashov has set up base camp. From here he is orchestrating his campaign to persuade shareholders in Arcelor that it is a good idea for them to fork out €13bn (£8.9bn) to buy his own steel company Severstal.

Mr Mordashov is apparently known in Russia as "the tank" because of his bear-like appearance. But the sobriquet is misleading. Contrary to his physically intimidating reputation, in the flesh he is soft-spoken and unassuming. Indeed, if anyone possessed a bone-crunching handshake it was not Mr Mordashov but one of his female lieutenants.

Mr Mordashov will need all the soft soap he can muster because the Severstal takeover - designed specifically to sabotage Lakshmi Mittal's rival bid for Arcelor - is unappealing from almost every angle. It puts a questionable valuation on both Severstal and Arcelor; it gives creeping control to Mr Mordashov and it is being railroaded through by the Arcelor board in a manner which shows contempt for its shareholders. Severstal replies that shareholder rights will be safeguarded by the regulatory authorities in Luxembourg, where Arcelor is based. But the good burghers of the principality have exhibited little inclination to regulate and even less authority since this takeover saga began five months ago. Luckily, some of Arcelor's shareholders have decided to stick up for their rights and there is every prospect of the necessary 20 per cent being mustered to requisition an extraordinary meeting to oppose the Severstal deal. This being Arcelor, the board does not have to take a blind bit of notice of the vote at an egm, should there be one. But it would send a warning shot across the bows of Joseph Kinsch and Guy Dollé, the duo who run Arcelor, that they would be ill-advised to ignore. Mr Mittal should not abandon hope yet, no matter how many roadblocks he encounters.

Life after Standard demutualisation

Expecting Standard Life policyholders to vote against £1,700 of free shares would have been like asking Bernard Matthews to vote against Christmas. But even so, Sandy Crombie must have been amazed at the 98 per cent majority in favour of demutualisation that he received yesterday.

The arguments for and against conversion have been endlessly rehearsed, but suffice it to say that times have changed. When Standard Life fought and beat off the carpetbagger Fred Woollard six years ago, mutuality was worth defending.

In retrospect, it was his tilt at Standard which spelt the beginning of the end. The then management felt obliged to vindicate their stand by refusing to cut bonus rates and aggressively writing new endowment business, so eroding the capital base. When the FSA changed the capital adequacy rules Standard had no option but to switch its investments from equities to bonds, making it even harder to rebuild its capital. Hence the reluctant decision to float, giving Standard access to a new form of shareholder capital which was not there before.

Had the FSA not put its very large spanner in the works, then things might have been different. As it is, Standard's main with-profits fund is in decline, leaving a smaller and smaller number of policyholders to take a bigger and bigger share of the risk. Turning those policyholders into shareholders will enable them, if they so wish, to continue holding their investments in Standard beyond the life of their policy.

The sun shone in Edinburgh yesterday. Mr Crombie can only pray that the gods look down kindly when Standard actually floats in July on what could be a turbulent stock market.

Fingleton's newspaper ruling

John Fingleton at the Office of Fair Trading has lost no time in making a name for himself. Hard on the heels of packing the supermarkets off to the Competition Commission, he is threatening to refer airports. Now he has grappled with newspaper and magazine distribution and decided that the OFT's initial judgment was right after all and that this is a monopoly which works against the interests of readers and is therefore ripe for competition.

The argument in favour of maintaining the monopoly is this: it guarantees that all newspapers and magazines continue to be distributed nationally and offers economies of scale which help to keep down costs. Opening up the market to competition would discriminate against small newsagents and hand too much power to the large supermarkets who could even use their leverage to influence editorial content

The argument against, which Mr Fingleton has bought, is that the monopoly entrenches inefficiency while competition could bring down prices. For newspapers and magazines, already facing a decline in advertising income, a threat to the cover price can only be worrying. But Mr Fingleton is doing this in the name of consumer choice, press freedom and plurality of the media. Hey ho.

m.harrison@independent.co.uk

Comments