Northern Rock Set to Name Virgin As Preferred Bidder

By David ProsserDeputy Business Editorand Eoghan Williams

A consortium led by Sir Richard Branson’s Virgin Group is set to be named as the preferred bidder for Northern Rock this morning, as pressure from the Government mounts for a speedy resolution to the crisis.

The bid would see Virgin take a controlling stake in the business and inject its Virgin Money operation, worth an estimated 300m, as well as making an initial investment of 1bn.

But the deal could still be blocked by Northern Rock’s shareholders, the largest of which have already warned that they will fight any sale of assets which they deem would undervalue the troubled mortgage lender. The current Virgin bid will value the new shares at between 20p and 40p each. Northern Rock ended last week trading at 86p, valuing it at 360m. A failure to agree on a sale may lead to the bank being taken into administration.

Sir Richard’s bid is understood to depend on continued support from the taxpayer for two to three years, with 11bn being repaid to the Bank of England immediately. The Treasury, which is reported to be growing impatient with the sales process, is understood to approve of the bid, but could yet decide to nationalise the bank if the buyers do not agree to repay the Newcastle-based group’s debt burdens of around 23bn under terms favourable to the taxpayer.

The Treasury in effect has a veto over any rescue plan, because of the scale of its loan to Northern Rock. Similarly, shareholders will be required to back a sale of the bank. In addition to the larger investors, small shareholders are also planning to take action in order to protect the value of their holdings, amid concern that a nationalisation of Northern Rock, which some analysts have called for, would lead to their losing out in the same way as Railtrack investors were hit when the Government took control of that company.

One source involved in the sale process said such issues meant the Treasury’s hopes for a quick sale of Northern Rock were unlikely to be fulfilled. “People want to demonstrate there is progress, but this is still a process that will take months to run,” he said.

The shortlist of bidders was drawn up by the bank’s advisory team of Merrill Lynch, Citigroup and Blackstone, after a series of weekend meetings and conference calls. By early yesterday the race had come down to two main bidders, with J C Flowers, the private equity group, providing the opposition to the Virgin consortium. Virgin emerged as the frontrunner in the early evening.

A third contender, Olivant, the investment firm run by Luqman Arnold, the former chief executive of Abbey National, remained on the margins of the process yesterday as he and colleagues tried to raise further finance. Although Olivant succeeded in winning backing from unnamed banks and promised to commit 450m of equity from itself and two partners – the Rock shareholders RAB Capital and SRM – it was not enough to win over Northern Rock’s board. Olivant believes that its proposals will also be more amenable to Northern Rock’s shareholders, who would continue to own a stake in the bank, which could eventually recover its value.

The Government’s continued support for Northern Rock drew fresh criticism from the acting Liberal Democrat leader, Vince Cable, last night. Mr Cable wrote to the Bank of England Governor, Mervyn King, to ask for assurances about the security attached to taxpayers’ money loaned to Northern Rock and the interest rates being charged. He said: “Taxpayers cannot be expected to continue to prop up this sinking ship, especially as much of our money is likely to get lost at sea. Taxpayers need to know whether Virgin will pay back their money in time and with interest.”

Northern Rock’s woes began in the summer’s financial turmoil, which froze up the money markets where the bank borrows most of its cash for mortgage lending. The lender was worth more than 5.2bn in February this year but the beleaguered bank is now valued at just 360m.

(c) 2007 Independent, The; London (UK). Provided by ProQuest Information and Learning. All rights Reserved.