Sir Adrian has financial backing from the investment bank Goldman Sachs and has held talks with the transport secretary, Alistair Darling, about the government's attitude towards a change of ownership at the state-backed company.

As well as being chairman of British Energy, the nuclear power group, and the life insurer Friends Provident, Sir Adrian is close to the chancellor, Gordon Brown, and has worked in close cooperation with the government before - most recently by chairing Crossrail, the proposed east-west rail link across the capital.

London & Continental is nearing completion of its 70-mile line to the Channel tunnel, which has cost £5.8bn. The final section is due to open next year, terminating at St Pancras and allowing trains to hurtle between London and the continent at speeds of up to 186mph.

The company also co-owns Eurostar alongside state railway operators in France and Belgium. But potentially its most attractive long-term asset is 120 acres of land around Stratford in east London which will form the site of the Olympic Village when the games are held in London in 2012.

LCR is owned by eight shareholders including Bechtel, National Express and UBS with just over 20% each. Others include France's SNCF and Electricit?e France with 13% apiece, and Arup and Halcrow with smaller stakes.

However, its fate is effectively in the hands of the government because £3.7bn of its £5.4bn mountain of debt is guaranteed by the Treasury and ministers have the right to veto a change of control. A statement from Mr Darling disclosed yesterday that the government had been approached by a third party with a view to acquiring the company. The transport secretary said the approach would be "considered against the primary objective of ensuring continuing value for taxpayers' money".

Inquiries by the Guardian established that Sir Adrian was behind the offer. A source close to the talks said: "It is a very serious approach and it is a bid team capable of moving very, very quickly."

LCR's financial situation is complex. In addition to £3.7bn of government-backed bonds, it has £1.6bn of debt securitised on access fees to the Channel tunnel rail link and a further £550m of bank borrowing.

Several of LCR's shareholders are keen for an exit, including construction companies which feel that their involvement should come to an end when building of the rail link is completed. There is also some impetus for a restructuring before the expiry of the management franchise for Eurostar in 2010.

The source said: "People's natural interest in this is coming to an end. There is a desire for a new vehicle with a more unified structure."

Sir Adrian's experience in financing the railway industry has included helping the government to put together Network Rail's takeover of the national rail infrastructure from Railtrack.

LCR's chief executive, Rob Holden, yesterday brushed aside talk of a change of ownership as "a distraction and a worry". He said: "My priority at the moment is to see completion of the rail link."

However, he said the company was actively considering using its experience in project delivery to help with preparations for the Olympics: "Increasingly, I'm starting to look at things other than transport where our project organisation could be useful. We've got major land interests at King's Cross and Stratford. Some of the [Olympic] facilities will be built on our land, so there are clearly opportunities."

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The Times: February 15, 2006

PFI guru in bid for Tunnel Link firm

By Angela Jameson, Industrial Correspondent

SIR ADRIAN MONTAGUE, the Chancellor?s favourite private finance adviser, has teamed up with Goldman Sachs to bid for London & Continental Railways, the company that runs the Channel Tunnel Rail Link and co-owns Eurostar.

The former Network Rail deputy chairman and Crossrail chairman, who has been a key government troubleshooter in the past five years, emerged yesterday as the main player behind a Goldman Sachs- financed approach to London & Continental shareholders.

The approach for the debt- laden company is thought to have the Government?s tacit approval, after news of it was revealed in a written statement to MPs from Alistair Darling, the Transport Secretary. However, other infrastructure investors, including Macquarie, the Australian bank, and Guy Hands, could now enter the race.

Talks between the Montague team and London & Continental shareholders are thought to be at a very early stage and a price for the company, which has £5.8 billion of debt, has not been discussed. Mr Darling has to give his consent to any change of ownership because LCR depends on taxpayers? money ? it has more than £3.75 billion of bond finance, underwritten by the Treasury, and £1.6 billion of debt, which is effectively a government subsidy.

Current shareholders include Bechtel, the American construction giant, and UBS, the City bank, with stakes of 22.5 per cent. National Express, the train and coach operator, has 20 per cent, while SNCF, the French state railway, and EDF, the electricity giant, have 13 per cent each.

Construction of the second phase of the Channel Tunnel Rail Link is due to be completed in 2007. Preference shares given to shareholders at the time of the last financial restructuring can be redeemed then.

Separately, Eurostar?s financial prospects have improved since the length of journey times from London to Paris was slashed two years ago. Passenger numbers are set to improve again when the second phase of the rail link is completed, with profitability expected at the end of the decade.

In a written statement to MPs yesterday, Mr Darling said: ?With construction of the link nearing completion, my department has been considering its future relationship with the project and with London and Continental Railways.

?A number of options have been considered, touching on future financial arrangements, the current structure of controls in light of current best practice in such projects and the structure of LCR and its subsidiary companies. Officials have for some time held discussions with LCR about the best long-term commercial structure.?

Credited with injecting commercial reality into the PFI process, Sir Adrian spent two years with the Treasury before leaving to become deputy chairman of Partnerships UK, the Treasury agency that promotes the use of PFI. He is currently chairman of British Energy, the nuclear generator.

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Innovation will be needed to realise value

Financial Times: February 14 2006
With its initial stage completed on time and within budget, the £5.2bn Channel Tunnel Rail Link was always an unusual infrastructure project.

So it is hardly surprising that any bidder for London and Continental Railways, the private consortium building the link, will have to use innovative techniques to realise value from the business, which is close to completing its second phase.

LCR is thought to have already taken many of the standard measures to exploit its financial structure. Most obviously, it has raised money against the security of the future revenues it is guaranteed for use of the high-speed Channel Tunnel Rail Link by domestic services to Kent.

Sir Adrian Montague, the former treasury adviser and merchant banker who yesterday emerged at the head of a group interested in a potential bid for LCR, is undoubtedly one of the UK experts on public-private partnerships. He may have the specialist knowledge to spot the financial opportunity in the situation.

Goldman Sachs, which is advising and financing the consortium, is also, according to observers, one of the few investment banks with the appetite to take on such a complex, risky and high-profile project.

But the bidding consortium will still have its work cut out. And in a further twist, it is understood that one of the keys to a deal may date back to 1998 when LCR almost collapsed and had to be rescued by the government.

At that time it had become clear that revenues from high-speed cross-Channel Eurostar passenger services, whose British arm LCR took over in 1996, were way behind original projections.

The likely future disappointment and an increase in the expected building costs of the 68-mile high-speed link from the mouth of the tunnel to London?s St Pancras station combined to bring LCR to the brink of collapse.

John Prescott, then Secretary of State for Environment, Transport and the Regions, stepped in to broker a rescue deal. Instead of being built in one stage, the line would be built in two. The first and easier stage of the project, stretching from the tunnel to Ebbsfleet in Kent, would be completed first. That section of line came into use in September 2003, cutting journey times between London and continental Europe by 20 minutes.

The second, far more complex stage, would involve tunnelling under north London. It is still under construction. According to the timetable, it should come into use in 2007.

The government also issued guarantees for £2.65bn of LCR?s debt and guarantees that set levels of future income would be received from domestic services on the high-speed line. These services, which are due to start in 2009, will sharply reduce journey times between Kent and London.

The 1998 restructuring left Bechtel, the project management company, and UBS, the investment bank, as the largest shareholders of LCR with an equal holding (22.4 per cent). National Express, the bus and train operator, came next in terms of its stake. SNCF, the French state train operator, followed with EDF, the French state electricity company, close behind. Finally, three smaller shareholders have a combined 7.5 per cent.

The restructuring is widely seen as a success. The first stage of the link was opened on time and within its £1.9bn budget.

?It looks like a pretty closely managed project,? says Adrian Lyons, director general of the Railway Forum, an industry body. ?LCR has more than fulfilled its side of the bargain with the government.?

However, a provision of the 1998 deal may have created the conditions for the approach announced yesterday. As part of the deal, 95 per cent of LCR shareholders? equity in Union Railways South, which built the line?s first stage, was turned into preference shares, which gain in value by 7 per cent each year but which shareholders will be able to cash in only when the line?s second stage opens during 2007.

A person familiar with the bid team?s thinking yesterday said the value in LCR lay in the preference shares rather than ordinary shares. It is not clear what price the consortium might put on the preference shares or LCR?s ordinary shares.

The value of the preference shares is, however, likely to be much clearer now than when the arrangement was set up in 1998. It is now clear that most of the complex tunnelling and building work to construct the new railway has been carried out without the serious cost over-runs normally associated with such projects.

LCR?s shareholders will need to be persuaded that it is worth selling out when the project is so close to completion and there is so little risk remaining in the project.

That is likely to be the main consideration deciding whether any deal goes ahead.