More digging to come for Eurotunnel

Shareholders have had a rough journey and it isn't over yet, writes Richard Shackleton

IN COMPARISON with the smooth journey between London and Paris under the Channel by sleek Eurostar express, shareholders in Eurotunnel have had a bumpy ride since the shares were floated in November 1987.

Only last month, Sir Alastair Morton, the co-chairman, warned that unless revenues from the pounds 10bn project improved, Eurotunnel "was in risk of failure". His comments were enough to send the share price on one of those all-too- frequent nose-dives that have jangled the nerves of investors.

Last year, Eurotunnel was the worst-performing share in the FT-SE 250, falling 48 per cent to 282p. Floated at 350p, the shares peaked at pounds 11.64 in June 1989 but have bobbed between pounds 3 and pounds 5 for much of the subsequent period. Comparison of past performance is made more difficult by two rights issues, one at 285p in 1990 and the other at 265p last year. (Taken together, they make the adjusted issue price 267p and the peak 871p.)

At Friday's close of 177p, they are just 2p above an all-time low of 175p.

As a result, original investors are now looking at a capital loss of nearly 50 per cent, over a period in which share prices generally have doubled. The story is made worse by dividend income comparisons. Eurotunnel has confirmed there is little prospect of a payout to shareholders before 2004.

Some City analysts say that even this is optimistic - at a time when blue-chip equities have seldom yielded less than 4 per cent, gilts around 8 per cent, and even the humble building society account, 4 per cent.

In other words, investors have got nothing back from a depreciating asset.So should they cut their losses and sell? Or hold on? Or even buy?

The big City investment institutions have already made up their minds. Most have long since sold out, leaving the bulk of the shares in French hands. But that still leaves a substantial number of small UK shareholders on the register, hanging on to take advantage of Eurotunnel's travel perks.

Investors who bought 100 shares in 1987 get two free trips a year on the car-carrying Le Shuttle. Those who topped up their holdings in 1990 with a further 700 shares are entitled to a 50 per cent discount on another trip each year. For them, throwing in the towel now would only make sense if there were an immediate danger that the company was about to collapse.

For investors who might be thinking of getting into Eurotunnel, it is a different story. For a start, there are no travel perks attached to shares bought in the market. Secondly, and more important, the company's financial position remains desperate.

Although the tunnel is up and running for freight, passenger, and car services, the initial trading has been patchy. Last year, teething problems and delays in commissioning rolling stock resulted in revenues pounds l00m below budget. A similar shortfall is on the cards this year, as the ferry companies fight tooth and nail to defend their patch.

With Eurotunnel technically in default on its debts of around pounds 8bn, the company cannot afford any slide in projected revenues - every pound is needed to meet the annual interest bill of pounds 700m.

The next hurdle comes in September, when Eurotunnel's 225 banks meet to decide whether to release the second tranche of a pounds 693m loan that was negotiated last year.

With revenues well below the company's budget, the banks could insist that they will only advance more cash if shareholders are made to pay up for a third time.And unless Eurotunnel's trading performance improves dramatically, it will almost certainly have to ask for further loans next year.

At that point, the banks might decide that their price for further assistance would be the conversion of debt into new shares - reserved for creditors only.

The banks would be unlikely to place such new shareholdings on a par with existing investors - particularly if the payment of dividends became a realistic prospect. It is more likely they would opt for the issue of a new class of preference shares which would guarantee them first call on any payout.

In short, investment in Eurotunnel now is an act of faith that is unlikely to be rewarded for a very long time - if at all.