LONDON/AMSTERDAM The state sell-off of Britain's 186-mph rail route hinges on how rosy a view bidders take of Europe's coming fast-rail revolution.
With a price tag of at least 1.5 billion pounds ($2.3 billion), a sale would be a welcome contribution to British government coffers as it seeks to tame a budget deficit that will near 150 billion pounds this year, and would bode well for further privatizations.
Goldman Sachs (GS.N) and Hong Kong billionaire Li Ka-Shing are among those circling High-Speed 1 (HS1), whose 35-minute route from St Pancras station in north London to the Channel tunnel could carry a third more trains.
"There is relatively little to do with the line; it's all about how many more trains it will take," said Richard Threlfall, UK head of infrastructure and projects at KPMG, which is advising a bidder.
This year the European Union prised open Europe's market for international passenger rail, touting a greener, more competitive future. A 12,000-km expansion of fast rail routes is underway across the continent.
Domestic trains use half HS1's 20-services-per-hour capacity. Eurostar uses another quarter for its Paris, Brussels and Lille services, while Deutsche Bahn AG DBN.UL is in talks to use the line too.
People familiar with the matter say at least four bidding teams are examining HS1 and indicative bids were due August 17.
Suitors include Li's Cheung Kong Infrastructure (CKI) Holdings Ltd (1038.HK); a consortium led by Goldman and Groupe Eurotunnel SA (GETP.PA); a group including Morgan Stanley (MS.N) and 3i's (3IN.L) infrastructure arms; and two Ontario pension funds.
In the year to March, HS1 expects to earn 135 million pounds before interest, tax, depreciation and amortization, on revenues of 263 million, a teaser sale document says.
Its business fits naturally with infrastructure investors who seek long-term, stable cashflows hedged against inflation.
Operators pay index-linked access charges, partly regulated and partly depending on the number of trains. Domestic services provide about 60 percent of revenue and are partly underwritten by the government.
Unregulated commercial activities -- car parks, billboards, and shop rentals at glitzy St Pancras and three other stations -- make up about a tenth of revenues, according to one person familiar with the matter. Freight services, due to start later this year, might add the same again.
Two other crucial questions are how cheaply bidders can borrow, and what return they expect on their equity.
UBS, which is running the auction, is also crafting a 3-year, 1.3 billion euro "staple" loan for any bidder, designed to leave HS1 at investment grade and permit a later bond refinancing, people familiar with the matter said.
But most consortiums reckon they can get cheaper, longer-term debt by rounding up their own bank backers, these people said.
The assets are staid compared to riskier, as-yet-unbuilt projects, so investors are unlikely to target internal rates of return (IRR) above 15 percent, market sources say.
Li's recent $9 billion entry into UK electricity, buying EDF's distribution networks, was premised on a safe but slim IRR of just 12 percent, low even by the infrastructure sector's fairly sober standards. A modest target like this, backed up by a big equity check from East Asia's richest man, could help him outbid rivals again.
(Editing by David Cowell)