A New Tunnel Vision

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The scene had all the hallmarks of a populist uprising. Some 6,000 infuriated owners of Eurotunnel stock converged last week in a massive, hangar-like convention hall near Paris' Charles de Gaulle airport to topple the company's embattled, button-down board. Led by a fiery businessman with multiple fraud convictions and a chairman designate who likes to travel by motor scooter, the rebels then anointed a new board made up of unemployed executives, retirees, a sociologist and one man under investigation for money laundering (which he denies). Welcome to shareholder activism, French style.

Their prize: the company that built and operates the Channel Tunnel, the rail link beneath the English Channel that was hailed upon its 1986 launch as Europe's largest privately funded infrastructure project. When the stock was introduced in 1987 at the equivalent of €5.33 per share, thousands of investors bought stakes in a transport monopoly serving two of Europe's largest economies. But this can't-lose company did just that: €9 billion in debt and unexpectedly low tunnel traffic have whittled the stock price to as low as 32¢. "The company has cash but it all goes to banks," says retired engineer Guy Ducreux, a 14-year Eurotunnel shareholder who supports the corporate coup. "The new board is a financial dream team."

It had better be, if it's going to do what its predecessor could not: reduce Eurotunnel's crushing debt and its crippling costs, boost revenues and send its long-grounded stock price soaring. So far, that hasn't happened — the stock dropped over 13% to 52¢ on the day after the coup. Fabrice Rémon, partner of the Deminor consultancy that advises minority shareholding groups, warns: "More than ever, you have to wonder about Eurotunnel's survival."

It has been a slow, dark journey. Construction of the "Chunnel" took from 1987 to 1994 — a year longer than planned — and costs hit twice the initial forecast. Estimates for passenger and freight business were overly optimistic.

	More than ever, you have to wonder about Eurotunnel's survival. — FABRICE RÉMON, partner, Deminor consultancy

The company had counted on at least 10 million people and 5 million tons of merchandise to travel through the tunnel annually by 2000. What they didn't count on was the popularity of discount airlines. Hence, in 2003, after eight full years of operations, Eurotunnel counted just 6.3 million passengers and 1.7 million tons of freight, and posted a €1.9 billion loss. The income shortfall has left the company scarcely able to honor payments to creditor banks, much less post profits or pay dividends. Financial aid from the British or French governments is explicitly prohibited in the 1986 treaty founding the project. "Without a doubt, the Channel Tunnel would not have been built if we'd known about these problems," lamented Eurotunnel's now-evicted CEO, Richard Shirrefs, in February.

Attacking the debt is the main priority of new chairman, Jacques Maillot, the founder and former chairman (having stepped down under pressure) of travel group Nouvelles Frontières. Maillot was appointed after he joined forces with stock tip-sheet publisher Nicolas Miguet to rally discontented shareholders and replace Shirrefs and his board. Miguet, who has had several run-ins with the law (including a 1999 conviction for fraud and forgery after he advised clients to invest in a firm heading into bankruptcy) was the principal organizer of the overthrow. He owns 7 million shares of the company's stock but has taken no official role on the board. He has backed Maillot's plan to renegotiate with creditors, raise Chunnel charges, increase productivity (without layoffs), and obtain some compromise form of government aid such as a debt guarantee. Sounds nice, but Rémon and others call that plan as unrealistically rosy as the original Eurotunnel projections. French and British officials scoff at ideas of state aid, and Maillot is hardly in a position to dictate to banks who have bailed Eurotunnel out at least three times before. The new board's margin of maneuver is perhaps even tighter than the old one's. "At best, creditors swap debt for capital, greatly diluting small holdings," Rémon says. "At worst, they refuse, wait until Eurotunnel is in default, and take full ownership."

The fate of the tunnel below the Channel is secure; it will operate under bank ownership if Eurotunnel folds. That scenario, however, would leave last week's triumphant small shareholders high and dry.