The decision is made as Groupe Eurotunnel prepares to buy back the last of a series of financial instruments formed during the company's complex 2007 restructuring.

Jacques Gounon, executive chairman of Groupe Eurotunnel, told the Financial Times he was undertaking the transaction partly to avoid problems with any bid for High Speed 1, which carries trains running at up to 300kph on the 108km span between the tunnel and London's St Pancras station.

High Speed 1, which cost £5.8bn to build, is likely to fetch between about £1.5bn and £2.5bn, according to a person familiar with the situation.

The UK government - which has long had the right to take control of the line after bailing out the private companies building it in 1998 - took over London & Continental Railways, the line's owner, on June 8. It is expected to start selling parts of the business next year.

"I'm looking carefully at the High Speed 1 privatisation," Mr Gounon said.

"If I want to have a simple, stable capital structure, it is because I don't want some commentators to argue if there is High Speed 1 privatisation that my complex structure will be a legitimate reason for Eurotunnel not to tender."

There would be clear advantages to having the tunnel and the line to London owned by the same company, Mr Gounon added.

One attraction would be the UK government's guarantee of the revenue the high-speed domestic service - due to be launched on a preview basis on Monday - will provide for the line.

High Speed 1 is expected to be separated from LCR's property assets and the company's stake in Eurostar, the cross-Channel high-speed train service, during any sale.

The UK government said yesterday it was close to concluding negotiations to turn Euro-star - which has previously been run by separate French, British and Belgian companies - into a single company.

Among the other potential bidders for High Speed 1 are likely to be infrastructure funds such as those run by Australia's Macquarie, Citigroup's Citi Infrastructure Investors and the Babcock & Brown European Infrastructure Fund.

See also:

Eurotunnel, Back From Brink, May Bid for High Speed U.K. Line

Bloomberg: June 26, 2009
By Steve Rothwell

Groupe Eurotunnel SA, operator of the undersea train link between England and France, said it plans to bid for Britain’s High Speed 1 rail line, capping a turnaround from near bankruptcy two years ago.

Eurotunnel may make an offer for the 186-mile-per-hour line when it’s tendered in a breakup of London & Continental Railways, which is owned by the U.K. government. The track forms the British section of the Channel Tunnel route from London to Paris, used by Eurostar Group high-speed trains.

“As a specialist infrastructure manager such an opportunity is something we would definitely consider,” Paris-based Eurotunnel said in a statement today. “The fact is that HS1 is about to be put up for sale and of course we would be interested in it.”

Eurotunnel, led by Chief Executive Officer Jacques Gounon, averted insolvency in 2007 when it reached an agreement with lenders and cut its debt by more than half. The company will pay its first-ever dividend this year after reporting net income of 43 million euros ($61 million) in 2008 as sales rose 4 percent to 748 million euros, even after a train fire disrupted journeys for months.

Eurotunnel was trading up 0.8 percent at 4.03 euros as of 9:53 a.m. in London. The stock has gained 4.7 percent this year, valuing the company at 765 million euros.

Eurotunnel is now “highly cash generative” and would probably fund a bid for the High Speed 1 concession at least in part from its own reserves, depending on the structure for the purchase required by the government, spokesman John Keefe said. The company had cash of 276 million euros on Dec. 31.

Formerly listed as Eurotunnel SA in Paris and Eurotunnel Plc in London, the company lurched through several crises after the 30-mile (50-kilometer) tunnel opened in 1994.

Traffic Shortfall

Passenger and freight trains never met traffic forecasts touted after construction began seven years earlier, when then U.K. Prime Minister Margaret Thatcher insisted the link be built entirely with private funds.

Eurotunnel escaped collapse in January 2007 after a French court approved a plan to cut its 6.2 billion pounds ($10.2 billion) of debt by more than half following 18 months of wrangling between the company and its creditors.

Following completion of the reorganization the stock began trading as Groupe Eurotunnel on July 2, 2007. Eurostar last year carried a record 9 million passengers through the tunnel, 10 percent more than a year earlier, giving a market share of 75 percent for the London-Paris and London-Brussels routes as more people take the train rather than fly.

St Pancras Revamp

The U.K. government plans to break up London & Continental after the company completed construction of the High Speed 1 line and the refurbishment of London’s St Pancras International station. Eurostar trains began running on the route on Nov. 14, 2007. Prior to that, Channel Tunnel services to the U.K. capital had used slower existing lines and terminated at Waterloo station.

London & Continental was created at the time of U.K. rail privatization in 1995 and was awarded the contract to operate High Speed 1 in 1996. Original shareholders included Bechtel Group Inc., SBC Warburg, National Express Group Plc, Virgin Group and London Electricity Plc.

Britain’s Department for Transport said on June 8 it was taking London & Continental into public ownership by purchasing its shares for a nominal sum. The government also took over finance subsidiaries liable for 5.17 billion pounds of bonds and notes.

U.K. Transport Secretary Andrew Adonis said then that a long-term concession in High Speed 1 would be sold to recoup some of the public investment in the railway.

Open to Competition

“The government has bought all the shares of London & Continental and brought it into public ownership with a view to opening HS1 up to competition,” Transport Department spokesman Simon Horsborough said today by telephone. “The plan is to let it out as a normal franchise and we will invite tenders.”

If Eurotunnel succeeds in a bid for High Speed 1 it will most likely manage and develop the line as Network Rail Ltd. does the rest of Britain’s rail infrastructure, with train operating companies applying to run services on the route, spokesman Keefe said.

Adonis has said he’s also reviewing the ownership of Eurostar, in which London & Continental has a 33 percent stake. French state railroad SNCF, or Societe Nationale des Chemins de Fer Francaise, owns 62 percent and Belgium’s SNCB owns 5 percent.

Deutsche Bahn, Air France

Deutsche Bahn AG of Germany has said it’s interested in taking over the U.K. stake, a move that’s opposed by SNCF, the newspaper Die Welt reported Jan. 14, citing Guillaume Pepy, the French company’s chief executive officer.

Paris-based Air France-KLM Group, Europe’s biggest airline, has also held talks with London & Continental about running a rail service through the Channel Tunnel, the Financial Times said April 1.

The FT said today that the High Speed 1 concession might fetch 1.5 billion pounds to 2.5 billion pounds, citing a person familiar with the situation who it didn’t identify. Neither the DfT nor Eurotunnel would confirm the figure when contacted by Bloomberg News.

Other possible bidders include Macquarie Infrastructure Group of Australia, Citigroup Inc.’s Citi Infrastructure Investors and Babcock & Brown Infrastructure Group, the FT said, without citing anyone.