Tunnel investors ready for court

French shareholders in Eurotunnel will start bankruptcy proceedings if they feel the debt-for- equity rescue package to be announced tomorrow is inadequate.

A significant fall in Eurotunnel's share price when it resumes trading on the London and Paris Stock Exchanges on Tuesday could trigger such action.

Mr Georges Berlioz, the lawyer representing Adacte, one of the more hard- line shareholder groups, said shareholders would not accept further losses.

"If the shareholders are left with a few pennies, this deal will be unacceptable to them. Why shouldn't they gamble on the chance that a bankruptcy proceeding will get them more benefit?" Mr Berlioz said.

Any bankruptcy proceeding would have to negotiate a minefield of conflicting French and British insolvency law, and would cause severe political headaches for both governments.

Mr Berlioz said a deal seen to be fair to both sides would receive a smooth passage: "We will support such a deal very strongly. But if shareholders are deprived of their rights, all manner of goodwill will not stop their ire."

The package to be announced tomorrow is the result of nearly a year of painful negotiations between the company and its six main creditor banks, including NatWest, who have been representing the 225-bank consortium that holds Eurotunnel debt.

The core of the package is thought to be a straight debt-for-equity swap at the par value of the shares, 163.7p, which will wipe out pounds 1.5bn of Eurotunnel's pounds 9bn debts and give the banks 49.9 per cent of the company.

On top of this the banks will receive a securitised income bond, paying revenue derived from the Eurostar service well before the company is expected to pay a dividend, in return for a further pounds 1.5bn debt. Finally, the banks will receive convertible preference shares in return for a third pounds 1.5bn slice of debt.

Both of these securities will be convertible into shares at around 285p - the price of the 1994 rights issue. The timing of such a conversion will be in the hands of the company. Once converted, the banks will own close to 75 per cent of the company.

Analysts differ widely on the implications of the rescue for the share price. Jeff Summers, Eurotunnel analyst for Klesch & Co., believes the company is worth anything from 50p a share to more than 200p, depending on which cash flow prediction is followed. "The problem is that based on their track record of forecasts, no one believes what Eurotunnel says," he said.

High interest rates and an economic downturn might still scupper the company's chances of survival, he said. "The Eurotunnel that comes out of this will have to be able to pay its way. There will be no second chances."

Richard Hannah, Eurotunnel analyst at UBS, said: "To make this business a viable investment, you have to destroy pounds 6bn worth of capital, both equity and debt, from the current total of pounds 12bn. The arithmetic would suggest the share price should go down by a lot - but then arithmetic has never been terribly relevant to this company."