Virgin group named preferred bidder for the Rock
Shares in Northern Rock (NRK) rocketed by as much as 57% today as a consortium led by Richard Branson’s Virgin Group was named the preferred bidder by the troubled mortgage bank.
A statement released today said that the Treasury backed the proposal from the consortium, which also includes buyout firm WL Ross and investment groups Toscafund and First Eastern.
Under the proposed bid, the consortium would make an immediate £11bn repayment towards the estimated £25bn owed to the Bank of England. It has also promised to invest £1.3bn in the company.
Insiders have said that the group’s commitment to paying back a large chunk of the money loaned to the Northern Rock to prop it up since it first ran into difficulties back in mid-September immediately, and repaying the rest with interest over the next two to three years ‘without placing a further burden on the taxpayer’, was central to securing the government’s approval.
Northern Rock shares fell in early trade on concerns that the rescue bid would dilute the value of shares. Half the £1.3bn cash injection will be funded by the consortium and the other half through a rights issue of 25p per share wish will only be available to existing shareholders.
If the bid were successful, the consortium would assume control of 55% of the business, with the remaining 45% in the hands of existing shareholders, should the rights issue be taken up in full.
In a post on the FT’s alphaville blog today, Branson said that one of his top priorities was to ‘stop the business being broken up and disbanded’, thereby saving thousands of jobs in the North-East. He also said with regards to the savings of existing customers that ‘the Government’s guarantee arrangements will continue to remain in place.’
It remains to be seen whether the Rock’s shareholders will accept the offer. As BBC economics editor Robert Peston writes in his blog today, the valuation placed on the company by the Virgin proposal is pretty meagre, but it would offer shareholders ‘an opportunity to obtain a good chunk of the gains’ if Branson successfully turns the company around.
And Northern Rock shareholders are looking short of other options at present. Should they reject the Virgin-led offer, it looks as though the bank will either be renationalised or placed in to administration, both of which would completely wipe out the value of shares.
