Is Britain's Eurostar stake worth £750m?

Chancellor George Osborne is to sell the UK's share in the transnational rail operator, but is he right to be pleased with himself?

by Adam Gale
Last Updated: 04 Mar 2015

The UK is to sell its 40% stake in the Eurostar to a consoritium of Canadian and British investors for £757m. Patina Rail LLP, which is made up of Canadian fund Caisse de Depot de Placement du Quebec and British investor Hermes Infrastructure, will pay £585m for the stake, while the Treasury will also net £172m from selling its non-voting preference shares back to Eurostar.

The government has had a stake in the London-based firm since British, French and Belgian operators were combined in 2010, though its financial interest goes back to the Channel Tunnel's construction 20 years ago.

Chancellor George Osborne seems pretty pleased with himself for bagging a sum that, he says, exceeds expectations. 'This a very good deal,' he said. 'It means we can cut the national debt, it means we can invest in our national infrastructure and it's fantastic value for British taxpayers. It's all part of our long-term plan to secure Britain's future.'

Getting another £750m in the coffers might seem like a win for a government that's trying to forcefully to reduce the deficit and pay off the national debt, but does it make good business sense? Eurostar is a profit-making business, after all.

Let's look at Eurostar through the eyes of, let's say, an Anglo-Canadian investment consortium. The firm had revenues of £867m in 2014 (up 1%), handling 10.4m passengers (up 3%). Its operating profit rose 2% to £55m.

Britain's share of those profits represents a 2.9% return on its £757m investment. The government is sparing itself interest payments by paying off that amount in debt, but British 10-year gilt yields are currently languishing at around 1.8%. Barring a massive hike in bond market, the money would have been better off left where in Eurostar.

Does that mean it's a bad investment? Not necessarily. The government has political reasons to get rid of its Eurostar stake. It's trying to raise £20bn from the sale of public assets by 2020, in an effort to make some inroads into Britain's £1.4 trillion debt mountain. Just another £1.30925 trillion to go then...

The sale has some symbolic value, but if the government think's it's made a good deal on purely commerical terms, it's probably mistaken. Eurostar is profitable and growing.There's a reason large institutional investors were keen to get their hands on it.

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