Eurotunnel’s Ferry Strategy at Risk as Rivals Cry FoulChris Jasper
Channel Tunnel operator Groupe Eurotunnel SA’s plan to boost cargo revenue by running ferries alongside the 30-mile subsea rail route risks unraveling amid opposition from antitrust regulators and shipping companies.
Eurotunnel must decide next week whether to bid for the French ports of Calais and Boulogne to complement its ferry unit. Creating that business has been hampered by opposition from the U.K. Competition Commission, while Britain’s P&O Ferries says the harbor purchase would hurt competition in one of the world’s busiest cross-border freight markets.
Eurotunnel spent 65 million euros ($82 million) in 2012 buying three roll-on roll-off ferries from state railway SNCF’s defunct SeaFrance arm in a bid to lift its 43 percent share of the 3.36 million trucks that cross between Britain and France at their closest point each year. The takeover of the French ports, mooted last month, would lay foundations for a wider business tapping all forms of surface transport across the Channel.
“If this were to develop into a full bid to operate the ports I’d imagine Eurotunnel would not have many friends at the Competition Commission, given what they had to say about the ferry business, because it does bring up some issues,” said Andrew Jones, an analyst at RBC Capital Markets in London who rates the stock “outperform.”
The Nord Pas-de-Calais Regional Council, which is auctioning a 50-year concession to run the harbors, located 20 miles apart on the Dover Strait, wants binding bids by March 9. It didn’t immediately respond to requests for comment today.
P&O wrote to Britain’s Office of Fair Trading on Jan. 8, saying a sale to Eurotunnel would result in a “substantial lessening of competition” by giving the tunnel owner control of two of the three French ports serving the so-called short-sea market with the U.K., leaving Dunkirk as the sole independent.
Eurotunnel Chief Executive Officer Jacques Gounon said last week he’d contest the U.K. Competition Commission’s findings regarding the June purchase of SeaFrance vessels Berlioz, Rodin and Nord-Pas-de-Calais, which operate under the MyFerryLink brand. The deal was approval by French regulators last year.
A shipping arm would complement Eurotunnel’s rail shuttle, with trucks using ferries in the event of the tunnel being restricted, and vice versa, Gounon said when he bought the ships. That would avoid diverting customers to companies such as P&O, which controls 35 percent of the Dover-Calais market.
MyFerryLink aims to win 9 percent of cross-Channel truck and car traffic, Gounon has said, allowing Eurotunnel to tap a trend toward “mega trucks” that are becoming too large for its trains. That’s after the company boosted truck numbers 16 percent last year to a record 1.46 million.
The Commission said Feb. 19 in preliminary findings that Eurotunnel had bought the ships to stop Danish ferry operator DFDS A/S securing them at a knock-down rate. The purchase will significantly increase the company’s “already high” share of the cross-Channel market and allow it to hike prices, it said.
Alasdair Smith, who led the inquiry, said excess capacity on the Dover-Calais route will most likely force one operator to exit. Customers would be better served by the retention of P&O and DFDS, which began services in a venture with Louis Dreyfus Armateurs after failing to buy the SeaFrance assets, rather than a company linked with the Channel Tunnel, he said.
The Commission, which proposed as a possible remedy only the full divestiture of MyFerryLink, saying price caps and firewalls won’t work, will publish a full report on April 14. The unit employs 500 people in France and about 100 in England.
“The acquisition of the ex-SeaFrance ships, nine months after that company ceased all operations, and the creation of a new competitor in the cross-Channel marketplace, constitutes an increase in competition and brings additional choice for customers,” Eurotunnel said last week, adding that ferry companies were using regulators to protect their own interests.
RBC’s Jones suggested Gounon’s main aim in bidding for the SeaFrance ships was to establish a fair market value for them and reduce the risk of a new entrant penetrating the market at a cost low enough to price aggressively and still make a return.
The analyst said he would not have been overly disappointed had Eurotunnel then parked the ships or exported them instead of actually operating them.
The unit of Dubai World, which offers 23 90-minute return sailings a day between Dover and Calais with six vessels, said the best outcome would be for Calais and Boulogne to remain in the hands of the other likely bidder -- and incumbent concession holder -- the Côte d’Opale Chamber of Commerce. P&O also opposed Eurotunnel’s takeover of SeaFrance.
John Keefe, a Eurotunnel spokesman, said this week that the company is already a diversified infrastructure operator and should be viewed as such as it seeks to expand its business. He declined to say if a decision had been reached on a ports bid.
Eurotunnel runs port assets via its Europorte rail-freight arm, which has contracts to manage, operate and maintain track to docks in cities including Paris, Bordeaux, Strasbourg, Nantes Saint-Nazaire, La Rochelle, Dunkirk and Le Havre. The unit was the company’s fastest-growing in 2012, lifting sales 28 percent.
Jean-Baptiste Roussille, an analyst at Societe Generale in Paris with a “buy” rating on Eurotunnel, said that while adding ports might make sense, he’d prefer to see growth in cash flow from the Channel Tunnel before any investment.
CEO Gounon also bought GB Railfreight in 2010 to help boost cargo-train flows that had dropped by two-thirds since a 1998 peak, while reducing reliance on business from train operators such as SNCF. The tonnage moved through the tunnel on dedicated freight services fell 7 percent last year and train numbers slid 3 percent to 2,325, the company said Jan. 23.
Eurotunnel is also working with EuroCarex, which groups French, Belgian and Dutch airports, on a project to run mail trains through the tunnel at night.
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