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Last Updated: Monday, 13 June 2005, 18:29 GMT 19:29 UK
How Eurotunnel went so wrong
Jeff Randall
By Jeff Randall
BBC business editor

Eurotunnel train
Eurotunnel is still losing money hand over fist

When the world's most successful investor, Warren Buffett, said, "if you overpay for an asset, there ain't no cure", he might have had Eurotunnel in mind.

From the word go, construction of the channel tunnel was blighted by delays which caused a rapid escalation of costs.

By the time Eurotunnel opened in May 1994, it was one year behind schedule and 2bn ($3.6bn) over budget.

Before the first passenger car had boarded Le Shuttle for the short trip from Folkestone to Calais, the original business plan was in tatters.

Missing passengers

To make matters worse, the company's rose-tinted projections of demand for Eurostar, the London-Paris train service that uses the tunnel, turned out to be embarrassingly aggressive.

Traffic forecasts were not just out by a little bit - they were completely potty
David Freud, Warburg

Although Eurostar is a completely separate entity from Eurotunnel, it is linked commercially to the channel tunnel operator because it pays a fee for using the facility, based on traffic numbers.

"We were predicting that on Eurostar there would be 21 million passengers (annually)," admits David Freud of Warburg, the investment house which sold Eurotunnel shares to the public.

The actual figure was less than a third of that.

"So the traffic forecasts were not just out by a little bit. They were completely potty; they were nowhere."

Those who drafted Eurotunnel's prospectus failed completely to foresee a robust response from the ferries.

Growing competition

Not only did P&O not fade away, as Eurotunnel had thought likely, it fought back with better ships and lower prices, retaining the loyalty of passengers who had been forecast to switch to the tunnel.

Another blow to Eurotunnel was the unexpected emergence of no-frills airlines, offering rock-bottom prices on short-haul trips to a wide range of European destinations.

P&O cross-channel ferry
Sailing across the Channel is still an attractive option

Flawed forecasts, management mistakes and bad luck turned the Eurotunnel dream into a financial nightmare for the investors and banks who funded the project entirely from private money.

Heavy losses - 500m last year, 1bn the year before - have meant that Eurotunnel has been unable to meet even its interest bills, much less repay capital.

As a result, Eurotunnel has been burdened with mounting debts, like straws being loaded on a donkey's back.

Inevitably, the company has buckled under the weight of its financial obligations.

With debts now standing at about 6.5bn, Eurotunnel can until the end of this year service interest charges with IOUs.

But thereafter the borrowing terms change and it must pay in cash.

Scraps

At that point, Eurotunnel's management knows the game will be up - which is why the chairman, Jacques Gounon, is desperate to renegotiate funding arrangements with the company's 200 banks.

Nicolas Miguet, leader of the Eurotunnel rebels
French shareholders ousted the board last year

His problem is that as well as keeping creditors sweet, he must try to placate 800,000 small - mostly French - shareholders who have seen the worth of the company crash by about 98%.

It's a fiendishly difficult task, because concessions to the banks inevitably mean a dilution for shareholders.

Each side is, in effect, competing for scraps of value from the Eurotunnel carcass.

Mr Gounon's response has been to draw up a rescue plan which asks the banks to let Eurotunnel off about two thirds of its debt.

He's hoping that creditors will be prepared simply to kiss goodbye to about 4bn.

If nothing else, Mr Gounon's move redefines positive thinking. It is optimism on a heroic, perhaps ludicrous, scale.

Make or break

Even some of Mr Gounon's colleagues are sceptical. Last week, Jean-Louis Raymond, Eurotunnel's chief executive, walked out in protest at his chairman's handling of the crisis.

The crunch comes this Friday, 17 June, when Mr Gounon and Eurotunnel's other directors confront shareholders at what is sure to be an acrimonious annual meeting in Coquelles, just outside Calais, the French terminus of the tunnel.

Eurotunnel Jacques Gounon
Chairman Jacques Gounon is fighting for his corporate life

There Mr Gounon will again face Mr Raymond, who plans to offer himself as an alternative chairman, and also Nicolas Miguet, the maverick investor who last year orchestrated the ousting of Eurotunnel's entire board.

Miguet dismisses Mr Gounon as a "clerk" and seems bent on stirring up yet more trouble.

But Mr Gounon told BBC News that if his plan is rejected by either shareholders or creditors the company will go bust.

The light at the end of this tunnel is fading fast.

A special Money Programme, "Britain's Biggest Black Hole", presented by Jeff Randall and investigating Eurotunnel's woes, was shown on BBC2 at 10pm on Tuesday 14 June.


BBC NEWS: VIDEO AND AUDIO
How Eurotunnel got itself into a black hole



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