Virgin team picked for Northern Rock rescue

A consortium led by Richard Branson’s Virgin Group has been picked as the preferred bidder to rescue Northern Rock and plans to repay £11-billion ($22,6-billion) quickly to the Bank of England.

Northern Rock said the Virgin consortium had set out a clear path to repay fully loans made to it by the Bank of England that are estimated to have reached £25-billion since a crisis around the bank erupted in mid-September.

Virgin’s consortium, which also includes buyout firm WL Ross, investment group Toscafund and Hong Kong-based investment group First Eastern, said under its plan £1,3-billion of new cash will be injected into Northern Rock.

Half the cash will come from the consortium and half will be raised through a rights issue at 25 pence per share. The consortium will also inject Virgin Money, the Virgin financial services company, into the bank, with an implied valuation for Virgin Money of £250-million.

Northern Rock shares fell as much as 18% in early trading on the prospect that the battered shares will be further diluted, but by 8.45am GMT the volatile stock had rebounded sharply and was up 14% at 98p, valuing the company at £410-million.

A deal could face problems from shareholders.

Northern Rock’s top two investors—hedge funds RAB Capital and SRM Global—have urged advisers to scrap the auction to prevent any firesale. SRM Global said an extraordinary shareholder meeting should be held to allow a vote on the sale of all or part of the bank.

Northern Rock said it did not consider such action “to be warranted or appropriate” but if necessary it would convene a meeting.

Shareholders could be told they need to accept a deal or risk the bank going into administration, people familiar with the situation have said.

Sandy Chen, analyst at Panmure Gordon, said the high cost of funding debt, a sharp slowdown in lending and a rise in bad debts on loans meant it is unlikely Northern Rock will return to profit until 2009 at the earliest.
Chen also cited the execution risk of a deal and cut his price target on Northern Rock’s shares to 40p.

Virgin plan

The Virgin consortium will hold no more than 55% of the enlarged group if the underwritten rights issue of shares is fully taken up.

Brian Pitman, who was chairperson and chief executive of Lloyds TSB and regarded as the most influential British banker of the 1990s, would be chairperson of the enlarged Virgin Money.

Jayne-Anne Gadhia, Virgin Money’s chief executive, would have the same position at the enlarged group, advised by George Mathewson, former chairperson and CEO of Royal Bank of Scotland and architect of deals including the takeover of NatWest.

Northern Rock said its board will continue to explore other options as part of its strategic review.

United States buyout firm JC Flowers was another front-runner for a deal but Virgin was picked after intensive talks over the weekend, people familiar with the situation said.

Other potential suitors include investment firm Olivant, backed by former Abbey National chief executive Luqman Arnold, and Cerberus, another US buyout firm, in tandem with US finance firm GMAC. - Reuters

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