JC Flowers bid in doubt as GMAC joins the bidding war for Northern Rock

29 October 2007
Another bidder has entered the ring and made a bid for Northern Rock, and questions are being raised as to which bidder would make the best parent for the struggling bank.

GMAC – a powerful American financial services group – has joined with New York private equity house Cerebus to launch a rescue attack of the UK bank which has been hit hardest by the knock-on effect of the sub prime credit crisis in the US.

JC Flowers made one of the earliest bids, and has compiled a group of financial industry heavyweights to run the bank – what the Sunday Telegraph has deemed a “building society mafia” – but the offer has been called into question because of a lack of clarity in its proposal. One of the issues flagged up is the government protection requested by JC Flowers in case Northern Rock’s shareholders take it upon themselves to sue once the deal has been done. It is expected to come back with a new assessment, but this leaves room for another bidder to get in there first.

Some – mostly shareholders – believe that the bank can be rescued without the need for a take-over which would leave shareholders with little if anything at all. More likely than shareholder-friendly solutions such as an independent operation that would protect jobs and the local charity foundation, however, is a takeover by one of the three bidders – JC Flowers, Virgin Money, or GMAC and Cerebus.

There is speculation that GMAC and Cerebus will harbour more credibility and be The Bank of England’s first choice, because the Bank would like to see Northern Rock be taken over by a tradebuyer as opposed to a financial one. It is predicted that the Treasury will also look favourably upon GMAC – an insurance company and bank – because it will mean that Northern Rock stays within the same sector.

The consensus is that the bidder which puts forward the best proposal to wean Northern Rock off its Bank of England funding, has the capacity to pay off its mounting £21 billion debt, and find the best way to keep the bank afloat will be the one which prevails.

Meanwhile, Britain’s savers seem to have been learning their lesson from the Northern Rock debacle which caused panic amongst its customers that their savings would be lost, leading to a mass exodus of cash from their accounts as they found somewhere safer to keep it. Building societies saw a record intake of £2.8 billion in September, while banks experienced a 90 per cent depletion in deposits for that month.

© Fair Investment Company