LONDON (Reuters) - Two Canadian pension funds will pay 2.1 billion pounds ($3.39 billion) to operate Britain’s only high-speed railway, the first privatization of a coalition government intent on cutting the national deficit.
Ontario Teachers’ Pension Plan (OTPP) and Borealis, the infrastructure investment arm of Ontario Municipal Employees Retirement System, beat rivals including Eurotunnel, Morgan Stanley and Allianz for the 30-year concession for the High Speed 1 (HS1) line linking London to the Channel Tunnel.
Passenger services through the tunnel, which is operated by Eurotunnel, are run by Eurostar and directly link Britain with France and Belgium.
“It is an enormous amount of money, a big vote of confidence in UK plc and a big vote of market confidence in the future of UK high-speed rail,” British Transport Secretary Philip Hammond said in a statement on Friday.
“It also shows the decisive action this government has taken to reduce the deficit is already paying dividends and investors believe once again that Britain is open for business.”
The coalition has vowed to reduce Britain’s debt and slash a budget deficit that this year will be about 150 billion pounds. The HS1 price tag beat analysts’ expectations for between 1.5 and 2 billion pounds.
The line, which cost about 5.8 billion pounds to build, became fully operational in November 2007.
It stands to benefit from the liberalization of the European cross-border rail passenger market, with Germany’s Deutsche Bahn planning to run direct services between London, Amsterdam and Frankfurt by the end of 2013.
Eurotunnel promised cost savings in its bid for the line, people familiar with the matter said. Its consortium included Goldman Sachs Infrastructure Partners and fund manager M&G’s Infracapital arm.
Other bidders included a consortium of Morgan Stanley Infrastructure, 3i Infrastructure Plc and the Abu Dhabi Investment Authority, and a grouping of Allianz, BT Pension Scheme and Canada’s Public Sector Pension Investment Board, people close to them have told Reuters.
Operators pay index-linked access charges to HS1, partly regulated and partly depending on the number of trains. They include Eurostar and Southeastern Trains, which operates domestic high-speed services.
Domestic services in southeast England provide about 60 percent of revenue on the 68-mile line and are partly underwritten by the government, while 40 percent stems from international services from London, Paris and Brussels.
In the year to March, HS1 expects to earn 135 million pounds before interest, tax, depreciation and amortization (EBITDA), so on that basis the sale represents a 15.6 times multiple.
HS1 is used every year by more than 9 million international and 5 million domestic passengers. Domestic trains use half its
20-services-per-hour capacity. Eurostar uses a quarter for its Paris, Brussels and Lille services, so Deutsche Bahn could take the other quarter.
In the past the government guaranteed the debt of London and Continental Railways (LCR), HS1’s parent company, after a public-private partnership scheme in 1998 failed to raise the private financing needed on overoptimistic traffic forecasts.
LCR was transferred to public ownership in June 2009. Britain will still own the railway and freehold to the land.
UBS advised LCR on the sale and Citi advised the Department for Transport. OTPP and Borealis were advised by Royal Bank of Canada and Lexicon Partners.
Writing and additional reporting by Greg Roumeliotis; Editing by Will Waterman and David Hulmes