Eurostar share sale likely to give French total control

France's state-owned operator SNCF may be the sole bidder for the UK's 40% stake

Two centuries after he dreamed of digging beneath the sea to reach his island nemesis to the north, Napoleon Bonaparte might have been surprised to see Paris and London linked so harmoniously by a sleek, silver train. But he would have been less surprised to learn that the British, that nation of shopkeepers, are set to flog off their share of the pioneering service.

The decision to sell the nation's stake in Eurostar, just under two decades since Queen Elizabeth chugged down the tracks from Waterloo before speeding through the French countryside with President Mitterrand, was confirmed this week by the financial secretary to the Treasury, Danny Alexander, as part of the updated infrastructure plan. The sell-off, first mooted by the coalition in 2010, was part of a doubled target for state asset sales to £20bn.

Eurostar, for all its significance, will form a tiny fraction of that. The majority 55% French stake is owned by the state-controlled SNCF, Britain has 40% via state-owned London & Continental Railways, and 5% is owned by Belgian state railways. Analysts suggest the British stake will fetch around £120m-£200m, or 0.2%-0.4% of the price of HS2.

After the accusations of undervaluing the privatised Royal Mail, ministers will be anxious about the price. A happier memory is the sale of Eurostar's effective landlord, HS1 – the company created to run the British high-speed link to St Pancras, a track finally built 13 years after Eurostar started services. HS1 was sold to Canadian investors for £2.1bn, 20% above estimates.

The government will soon start appointing advisers to run the sale, on a broad timeline to conclude by 2020. But the City view is that this may only attract one bidder: SNCF. Gerald Khoo, transport analyst at Liberum Capital, says: "Realistically, there's only one obvious buyer: the owner of the 55%. Theoretically you might get someone who wants in, but a stake of something someone else owns and controls doesn't appeal to that many people. And if you've only got one buyer, you get the worst price."

The limited figures published by Eurostar suggest that, despite historically falling short of forecast passenger numbers, it pulls in solid returns on an effective monopoly. With revenues around £800m and profits for 2012 doubling to £53m, the profit margin of 6.5% appears handsomely above that of domestic train operators. The limited data makes analysts loth to put a price on the stake, although one suggests a figure in the low hundreds of millions.

Douglas McNeill, investment director at Charles Stanley, takes a punt at £500m-£700m for the company overall, which owns its rolling stock and has net cash in the bank. For a minority stake, Britain could expect a little less than the value of the 40% it owns. He rules out any UK transport groups bidding, saying: "You'd think SNCF was the prime contender. Otherwise, I'd look more towards private equity firms or infrastructure funds. It's a utility-type business that ought to be able to deliver unspectacular but steady returns over time."

Its effective monopoly will end when Deutsche Bahn also starts running trains through the tunnel. While a target date of 2016 has been mentioned, the German rail operator is understood not to have ordered trains yet, making that look likely to slip.

Eurostar claims their arrival can only help. Mary Walsh, its communications director, says: "We'd welcome competition – it helps grow the market overall by transforming consumer perception."

That perception will also be helped by Eurostar's decision to bid for the East Coast rail franchise with Keolis – raising the intriguing prospect of Eurostar from Edinburgh to Paris and beyond. Even if the French bid is successful, the east coast service won't be branded Eurostar, but the firm believes its experience in service for both business and leisure passengers puts it in good stead for a new train franchise.

Walsh says: "All these initiatives help foster enthusiasm for greater connectivity, and change the mindset that you can travel by train rather than plane at higher speeds over longer distances."

Eurostar has raised £700m to overhaul and expand its existing fleet, and is stretching its routes to the Swiss Alps, Provence and – by 2016 – direct to Amsterdam, including a stop at the Air France-KLM hub of Schiphol airport. Having initially suffered a drop in passenger figures when budget flying took off, making it cheaper for Brits to fly to distant reaches of the continent than travel by rail to Paris, Eurostar may find new markets as a feeder to long-haul aviation.

In short, things look relatively rosy. So should the government cash in?

Unions are opposed. The RMT's Bob Crow says it's typical that the government is "prepared to flog off the valuable public stake in Eurostar just as this expanding and important service is moving into a new period of growth". Mick Whelan, general secretary of Aslef, says: "The coalition sold this country short on the Royal Mail and it's going to sell this country short on Eurostar."

And would the French ever countenance selling? A spokesman for SNCF says: "No! In a hundred years, maybe. The British may be retreating; but for the French, it's really the contrary. Eurostar is a real success story for SNCF. We're in there for the long term."


Gwyn Topham

The GuardianTramp

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