By Carole Dennett
An email from independent fund managers, sent to some of the Island’s elected representatives has laid bare the financial crisis at ferry operator Red Funnel and raised further questions.
In Friday’s newspaper we revealed that despite previous denials from the ferry company that it was up for sale, the email from Edward Lilley, senior investment director at Arcus Investment Partners (AIP) has not only confirmed that the troubled ferry operator has been up for grabs for months, but also revealed the scale of Red Funnel’s problems.
Mr Lilley wrote that there is a need for “immediate investment”, believed to refer to an entry in the company’s accounts showing that an external loan of £40.7 million was due for repayment in July. It is understood this has been extended to allow the company to try to get a sale over the line.
He further explained: “Red Funnel has a near-term need for very significant investment in new vessels and shoreside infrastructure – investment in the hundreds of millions of pounds.” Adding: “The entire fleet of RoRo ferries is reaching the end of its useful life and is experiencing increasing challenges with operational reliability…Further, the Cowes’ terminal facilities require significant capital expenditure to replace terminal buildings, marshalling yards, pontoons, and linkspans.”
It’s hard to argue with Mr Lilley’s analysis about the need for new vessels for the troubled company. Last month (August) the company only ran its scheduled vehicle ferry services for 12 days out of a possible 31.
Mr Lilley goes on to lay bare the severity of the situation stating: “The large near-term investment requirements for Red Funnel are not tenable for a company which has reported significant operating losses in recent years, and the business needs the support of a new shareholder with the capital and expertise to undertake this multi-year investment programme.”
The letter sought support for AIP’s plan to “acquire the business”, referring to “the significant risks involved in undertaking such a large-scale investment”. He added that the issue “transcends party politics” and claimed that there had been “misinformation” in the local press. The IW Observer contacted him last week and asked him to correct anything that we had published that was not correct – along with asking him a number of other questions. He hasn’t even acknowledged our email.
Enquiring whether our elected representatives would act as “constructive partners” if AIP did purchase Red Funnel – he says he wants to “hear your perspectives”. Usually, a constructive partnership would be based on both sides starting out honestly. Yet in claiming that Red Funnel has suffered “significant operating losses” in recent years Mr Lilley glosses over the fact that Red Funnel’s accounts show that the company’s EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortisation – a measure of the company’s core performance rather than the effects of non-core financial expenses) was a smidge under £15 million in 2022 and £13 million in 2021.
Hopefully AIP’s due diligence has uncovered that both the Island’s two new MPs and the IW Council are committed to working with the new government in a way that “transends party politics” to find a way to change the financing model of our ferry companies that have damaged the Island and our economy so much, including potential legislation. Indeed Richard Quigley, the MP for Isle of Wight West, is in touch every week with the Department for Transport, and has been speaking regularly to the Secretary of State, Louise Haigh, and her team about possible options. Joe Robertson, MP for Isle of Wight East has also met with her, confirming his support for a cross-party solution to be found.
Finally, Mr Lilley’s email reveals that the AIP has “invested significant resources diligencing the Isle of Wight ferry companies” – so not just Red Funnel. Due diligence is carried out before the purchase of a company. Does that mean AIP are interested in buying either of our main cross-Solent operators? Or both of them? Or were they just looking at the entire market with a view to purchasing Red Funnel? As Mr Lilley isn’t in the mood to answer questions there seems to be no way of finding out – unless our readers know more! You can contact us at newsdesk@iwobserver.co.uk or anonymously HERE.
This does seem to be the first time that any potential investors have made any real effort to find out the views of the Island’s political leaders in advance of buying either company. Previously the council and MPs have been presented with a ‘done deal’. One can only speculate about the reasons for this new approach, however “ham-fisted” it was, as described by one of the recipients.
The real question is whether time has finally been called on the financial model in which IW ferry operators operate their services. The companies have repeatedly been sold to investors who effectively require the businesses to repay the ever-higher costs of buying the businesses through their revenues – the fares charged to ferry users – the fares are no longer any reflection of the cost of operating the ferries – and despite the sky-high fares there has been no significant investment in new vessels. It is clear the Island needs a new financial model for our cross-Solent lifeline services. Is this the moment when that finally happens?
In response to a request from Bronwyn Hamilton Brown of the Wightlink User Group on Facebook – here is the text of the email from AIP:
From: Edward Lilley
Sent: Thursday, August 8, 2024 9:36 AM
To:
Cc: Subject: Introduction – Arcus Infrastructure Partners re: Red Funnel
Dear XXXXXXXXXXXXXXXXXX,
You may be aware that in early 2024 representatives of the existing shareholders of Red Funnel resigned from the Board of the company. This follows several years of extremely challenging trading conditions for the business, which has been severely impacted by COVID-19, the lockdowns, and post-COVID high inflation. In addition to this difficult macroeconomic backdrop, Red Funnel has a near-term need for very significant investment in new vessels and shoreside infrastructure – investment in the hundreds of millions of pounds. Following the resignation of the existing shareholder representatives, the company and its lenders have initiated an urgent sale and capital-raising process for the business. Arcus Infrastructure Partners is considering the potential acquisition of and investment into Red Funnel.
Arcus Infrastructure is an independent fund manager focused solely on investments in European infrastructure. Our underlying investors are predominantly UK and European pension funds and institutional investors. We seek to invest for the long-term and have a keen focus on delivering high quality public and private infrastructure, which maximises positive social and economic impact. Arcus has a long track record as an investor in and developer of UK infrastructure, including rail assets (Angel Trains), ports (Forth Ports), and smart meters (SMA and Horizon). We have experience as an investor in maritime infrastructure and have invested significant resources diligencing the Isle of Wight ferry companies.
Red Funnel requires immediate investment. The entire fleet of RoRo ferries is reaching the end of its useful life and is experiencing increasing challenges with operational reliability. These ferries can and should be replaced with hybrid vessels which deliver a much-improved emissions profile and quality of service. Further, the Cowes’ terminal facilities require significant capital expenditure to replace terminal buildings, marshalling yards, pontoons, and linkspans. The large near-term investment requirements for Red Funnel are not tenable for a company which has reported significant operating losses in recent years, and the business needs the support of a new shareholder with the capital and expertise to undertake this multi-year investment programme.
The Isle of Wight ferries are critical infrastructure for the Island and have been so for more than a century. We aspire to support Red Funnel through the years ahead, with investment to rejuvenate the entire fleet and ports, delivering high-quality and environmentally friendly ferry infrastructure for the Island. However, given the significant risks involved in undertaking such a large-scale investment, we would first like to hear your perspectives. There is much speculation in the local press around the future of the ferry companies, including a lot of misinformation. Knowing that you would be constructive partners for a future investor into Red Funnel is an important threshold item as we consider whether to acquire the business and support the required investment.
We have reached out to all of you as this is an issue which transcends party politics, and we would very much welcome a meeting in the coming days to discuss this further.
Kind regards,
Edward
Edward Lilley
Senior Investment Director
ARCUS INFRASTRUCTURE PARTNERS LLP
6th Floor · 1 Aldermanbury Square · London EC2V 7HR · United Kingdom
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