DEALTALK-UK route offers fast-track into European rail boom

(For more Reuters DEALTALKS, click [DEALTALK/])

* Goldman, Li, M. Stanley, Ontario funds circle rail line

* High Speed 1 could take one third more trains

(For more Reuters DealTalks, click [DEALTALK/])

By Quentin Webb and Greg Roumeliotis

LONDON/AMSTERDAM, Aug 31 (BestGrowthStock) – The state sell-off of
Britain’s 186-mph rail route hinges on how rosy a view bidders
take of Europe’s coming fast-rail revolution.

With a price tag of at least 1.5 billion pounds ($2.3
billion), a sale would be a welcome contribution to British
government coffers as it seeks to tame a budget deficit that
will near 150 billion pounds this year, and would bode well for
further privatisations. [ID:nLDE60U04I]

Goldman Sachs (GS.N: ) and Hong Kong billionaire Li Ka-Shing
are among those circling High-Speed 1 (HS1), whose 35-minute
route from St Pancras station in north London to the Channel
tunnel could carry a third more trains.

“There is relatively little to do with the line; it’s all
about how many more trains it will take,” said Richard
Threlfall, UK head of infrastructure and projects at KPMG, which
is advising a bidder.

This year the European Union prised open Europe’s market for
international passenger rail, touting a greener, more
competitive future. A 12,000-km expansion of fast rail routes is
underway across the continent.

Domestic trains use half HS1’s 20-services-per-hour
capacity. Eurostar uses another quarter for its Paris, Brussels
and Lille services, while Deutsche Bahn AG [DBN.UL] is in talks
to use the line too. [ID:nLDE65M1PA]

People familiar with the matter say at least four bidding
teams are examining HS1 and indicative bids were due Aug. 17.

Suitors include Li’s Cheung Kong Infrastructure (CKI)
Holdings Ltd (1038.HK: ); a consortium led by Goldman and Groupe
Eurotunnel SA (GETP.PA: ); a group including Morgan Stanley (MS.N: ) (Read more about the money market today. )
and 3i’s (3IN.L: ) infrastructure arms; and two Ontario pension
funds. [ID:nLDE67G0S0]

NATURAL FIT

In the year to March, HS1 expects to earn 135 million pounds
before interest, tax, depreciation and amortisation, on revenues
of 263 million, a teaser sale document says.

Its business fits naturally with infrastructure investors
who seek long-term, stable cashflows hedged against inflation.

Operators pay index-linked access charges, partly regulated
and partly depending on the number of trains. Domestic services
provide about 60 percent of revenue and are partly underwritten
by the government.

Unregulated commercial activities — car parks, billboards,
and shop rentals at glitzy St Pancras and three other stations
— make up about a tenth of revenues, according to one person
familiar with the matter. Freight services, due to start later
this year, might add the same again.

Two other crucial questions are how cheaply bidders can
borrow, and what return they expect on their equity.

UBS, which is running the auction, is also crafting a
3-year, 1.3 billion euro “staple” loan for any bidder, designed
to leave HS1 at investment grade and permit a later bond
refinancing, people familiar with the matter said.

But most consortiums reckon they can get cheaper,
longer-term debt by rounding up their own bank backers, these
people said.

The assets are staid compared to riskier, as-yet-unbuilt
projects, so investors are unlikely to target internal rates of
return (IRR) above 15 percent, market sources say.

Li’s recent $9 billion entry into UK electricity, buying
EDF’s distribution networks, was premised on a safe but slim IRR
of just 12 percent, low even by the infrastructure sector’s
fairly sober standards. A modest target like this, backed up by
a big equity cheque from East Asia’s richest man, could help him
outbid rivals again.

For an Analysis of Europe’s fast-rail boom, click
[ID:nLDE5BF0H5]
(Editing by David Cowell)

($1=.6447 Pound)

DEALTALK-UK route offers fast-track into European rail boom