Eurotunnel and return on capital employed

Was it wise to invest in Eurotunnel in the 1980s? Everyone involved recognised that it was a long term project with a potentially long payback period. Investments like these are difficult to appraise when they are launched, especially since future returns are so distant they have to be discounted and seen in terms of their net present value. And will the shares increase in value? What about the dividend yield?

Don’t worry about tricky maths and financial concepts. You don’t have to be an accountant to see that Eurotunnel shares have been a poor investment. After 22 years, Eurotunnel is paying its first dividend, of a whopping €0.04 (3.56p) per share.

At least the Channel Tunnel operator has reported net profits for the year of €40 million (£35.6 million). That compared with a loss for 2007 of €12 million. The profits came despite a sharp drop in traffic during the final three months of 2008 — when trade was hit by a fire in the tunnel in September — which meant full-year revenues rose by only 4 per cent to €748 million.

Jacques Gounon, chairman and chief executive of Eurotunnel is quoted in The Times

“Despite the incident in September, the year 2008 clearly marks the end of financial uncertainty for Eurotunnel. Through its efficiency and the control of its costs, the group has recorded a solid profit which, for the first time in our history, allows us to pay a dividend to our loyal shareholders.” Mr Gounon also said that Eurotunnel’s debts, which had been €9 billion until its restructuring two years ago, were now €3.8 billion. He quipped: “Two years ago, we were heavy with debt. Now there are others, like the banks, who have much more than we have.”

Eurotunnel raised £770 million by selling shares at 350p each when it was ‘floated’ in November 1987. But anyone who bought those shares has lost nearly all of their investment thanks to a series of deals with the banks. They took over 60 percent of the business in 1997, in return for reducing Eurotunnel’s £8.7 billion debts by about £4.7 billion. This happened again in June 2007 leaving 87% of the business in the hands of the banks.

It all means that any investors who have clung on grimly since the flotation have lost at least 95 per cent of the value of their investment.