Mind Your Business - 18 November 2008

Case Study - Eurotunnel

Eurotunnel is a company in a curious position. This is a company making reported profits, but in reality is still making huge losses. In 2006, it reported revenues up by 5% to £568 million, and this rose further to £586 million in 2007. The company's 2004 results showed a loss of £570 million. The company announced a loss in 2003 of £1.33 billion, this had risen to around £2 billion by 2005. In 2006, the company announced a 'trading profit', but this was calculated on the basis of company restructuring. This restructuring effectively wiped out some of the debt that the business had.

Eurotunnel was meant to be financed by private capital. The project had been discussed for some years but, in deriving all its finance from private sources, it immediately had very high debts. Work on a channel tunnel had begun as far back as 1973, but it was shelved due to political and economic crises.

In 1984, the project was re-launched and two years later, Margaret Thatcher, the British Prime Minister, and the French President, François Mitterand, signed an agreement that confirmed Eurotunnel as having won the bid to continue the construction. The initial construction work began in 1987.

Such a project had clearly never been tried out before so everyone was working in uncharted territory. Costs rose and the budget was regularly exceeded. By the opening of the tunnel in 1994, the company's debts had spiralled and were close to £10 billion. The company had to renegotiate the terms of its debt with its creditors, but still faced problems, which its Chief Executive listed as:.

• a lack of use of the infrastructure - an inability to attract business because of high access charges;
• too much debt (at the time standing at £6 billion) meaning its interest payment burden was too high;
• a much lower volume of both passenger and rail traffic than forecast (passenger use was forecast at 16 million when it was actually 6 million, freight volume at 7 million tonnes when it was actually 1.7 million tones); and
• that the industry was fragmented and in conflict.

Eurotunnel's shuttle business (for trucks, cars and coaches) has been a great success, and is the market leader for cross-Channel travel. There are also access charges for other train operators that use the Tunnel, including Eurostar, EWS and SNCF, however, and Eurotunnel wishes to tackle these. It also faced increases in costs to counter the problems associated with illegal immigrants attempting to get to the UK. This problem also frustrated attempts to increase freight use through the tunnel; it is now not considered a factor that is impacting on Eurotunnel's performance, but nevertheless highlights the difficulties that Eurotunnel faces, some of which have largely been out of the company's control.

Eurotunnel's strategy is to expand its operations looking to secure routes to Switzerland, Holland and Italy, opening new leisure complexes and a variety of regional train links. But the serious side of the strategy rested on its ability to be able to restructure its debts and have greater control over its pricing. Eurotunnel believed that if it could reduce its access charges to both freight and passenger carrying companies, it could increase volume and revenue.

Its problem was that it was caught in a vicious circle - it needed to levy high access charges to meet its interest payments, which in turn caused conflict because it cut volumes, meaning that its revenues were less than they could have been, and so it had problems paying off its debts. It believed that freight volumes would increase from 2.5 million to 10 million tonnes if it could cut access charges by 50-60%.

In April 2004, the problems it faced over its future came to a head when the joint Anglo-French board of directors was replaced by an all-French team headed by Chairman Jacques Guonon. In July 2006, the company asked French courts to freeze their £6.2 billion debt to enable them to be able to negotiate a deal to restructure. Earlier attempts at this had failed. In August 2006, the court granted Eurotunnel's request for protection from insolvency, which gave the company six months to be able to find a way of restructuring its debt.

The company came up with a new deal, which gave existing shareholders a 13% stake in a new company that would in turn bid for Eurotunnel's shares in 2007. The new business was to be called Groupe Eurotunnel (GE). It was given a new loan of £2.84 billion to help it, and also issued around £1.275 billion worth of bonds, which holders could use to exchange for cash or shares. Eurotunnel hoped that the plan would enable it to cut its debt by more than half. In November 2007, Eurotunnel announced that it had succeeded in getting agreement on a new plan to restructure the debt. Old shareholders were able to buy into a new company and the reorganisation plan enabled the company to reduce its debt from £6 billion to £2.8 billion. It was hoped that this would signal a new period for the company and a more stable financial future.

The company announced that it was more optimistic about its future and believed that the restructuring plan would help it to be able to move into profit albeit based on a different cost and debt structure than it originally had.