IT started as an ordinary day for Rob Holden, executive chairman of London & Continental Railways (LCR), the company building the high-speed rail link between London and the Channel tunnel. He was in a cab on the way back to his office when one of his shareholders rang with some surprising news.
Sir Adrian Montague, a City heavyweight and former deputy chairman of Network Rail, had secretly approached LCR investors to assess their willingness to sell shares.
It amounted to a backdoor takeover attempt for the infrastructure firm, which also owns and operates the British side of Eurostar trains. But Montague’s tactics backfired. At least half of LCR’s investors said that if he wanted to acquire the company he would have to deal with the board.
Holden, who was informed 10 days ago, said: “It came as a bit of a surprise in terms of timing.” He said LCR’s £5.2 billion Channel tunnel rail link was at a crucial stage and would not be finished until late next year.
Montague has teamed up with Goldman Sachs and Lexicon Partners to bid for the debt-laden company. Talks are at a very early stage. Some of the biggest shareholders in LCR are Bechtel, the American construction giant, City bank UBS and National Express, the train and coach operator.
The approach for LCR was revealed last week in a written statement to MPs from Alistair Darling, the transport secretary. He has to give his consent to any change of ownership because LCR depends on taxpayers’ money. It has £3.7 billion of bond finance underwritten by the Treasury and £1.6 billion of debt securitised on access charges that the train companies pay for using the railway line.
Montague, who is also chairman of British Energy and Friends Provident, is interested in buying the company’s equity, which amounts to £45m of preference shares and a raft of ordinary shares. The shareholdings would give him ownership of the company.
LCR is the consortium that is building the rail link. It is funded by a public-private partnership.
In 1998, LCR was restructured so that the high-speed link would be built in two parts to keep it on time and on budget. Montague, who was then advising the Treasury, was one of the architects of the restructuring. His counterpart at the transport department was David Rowlands, now permanent secretary at the department and the industry’s port of call over LCR.
The restructuring worked, and the first phase was opened in 2003 by Tony Blair. He said: “There are not, frankly, many prime ministers or indeed ministers, who have launched a major infrastructure project, who can stand confidently in front of the words ‘on time and on budget’ but we’ve done just that with the Channel tunnel rail link.”
Eurostar’s financial performance turned a corner after the opening of the link’s first phase slashed journey times from London to Paris. Construction of the second phase is due to finish in 2007. Eurostar trains will be able to whizz along at up to 186mph through Kent.
Eurostar is forecast to bring in income of £120m from 2009 when a high-speed domestic rail service will start operating using Hitachi trains. The domestic service is expected to generate revenue of £20m a year.
LCR also has a property portfolio of prime sites in southeast England worth hundreds of millions of pounds. It includes Stratford City, a 120-acre site in London being developed for the 2012 Olympics. After the games, the Olympic Village will be turned into a retail and office complex with 5,000 homes. LCR owns another 67 acres at King’s Cross, where it has applied for planning permission. This could have up to 2,500 homes and 8m sq ft of commercial space.
Despite the property bank, the debt and potential income streams from Eurostar, it is believed Montague would pay only for the equity under the bid he is putting together. Holden said: “It is a no-cost option with a high degree of opportunism.”
Montague spent two years at the Treasury, where he was credited with injecting commercial reality into the Private Finance Initiative (PFI). He left to become deputy chairman of Partnerships UK, the Treasury agency that promotes PFI. He also helped to put British Energy back in the FTSE 100.
His precise plans for LCR are being kept under wraps but he wants to bring a coherent, unified shareholding to LCR. He believes the current investors are a disparate band and that more value could be realised in all LCR’s activities.
His bid advisers, Chris Houston at Lexicon and James Wardlaw of Goldman Sachs, both have extensive investment-banking and transport experience, and all three have worked on government transport projects. Their interest in LCR has triggered accusations of cronyism.
Houston advised the government on the 1998 LCR restructuring when he was at Schroders investment bank, now part of Citigroup.
Holden said the involvement of Wardlaw, who attended meetings on LCR while he was working at the Treasury, “raised a number of questions”. Wardlaw left the Treasury in May.
Holden has his own plans for LCR, known as Project Blueprint, which would involve splitting the business in three: the rail infrastructure, Eurostar and the property portfolio.
He said: “Once the railway is completed, we will be in pole position to extract value from Eurostar and by selling the land.” If Montague does bid, Holden wants it as part of an open auction after the rail link is completed, otherwise the project could be delayed.
Holden is no stranger to controversy. An accountant by training, his industry experience includes working on the Trident nuclear programme. With accusations of cronyism flying over Montague’s approach to LCR, he could be sitting on another explosive situation.
