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Northern Rock crisis builds: Ejected from the FTSE 100, boss quits, and bidder threatens to pull out

13 December 2007
Northern Rock's options are narrowing as one of its major bidders has given it an ultimatum and threatened to withdraw its offer if the bank does not act quickly to resolve the situation and make a decision regarding its future.

The bank's worsening state and inability to act quickly seems to be too much for its chief executive Adam Applegarth, who has announced that he is quitting the struggling bank more than a month before he was set to leave after giving his resignation last month.

It is believed that a conclusion to the saga will not be met until mid-January, and Luqman Arnold, head of Olivant, the group which is threatening to pull out, says that he could drop the bid by the end of the week if the process is not accelerated. He is frustrated by the amount of time it's taking for Northern Rock and the Government to choose a fate for the bank, which will be administration, nationalisation, or a buy-out by Olivant or Richard Branson's Virgin Group.

Arnold also said he is becoming impatient with lenders who have agreed to provide the loans necessary for the purchase, but which are stalling on confirming this in writing as the ongoing global credit crisis continues to make lenders reluctant to guarantee such huge loans.

With each week that passes without a solution for Northern Rock, the bank deteriorates more; it has borrowed a further £4.5 billion from the Bank of England over the past few weeks, bringing its debt near the £30 billion maximum, and its value has continued to plummet, currently standing at about £440 million, compared to £5.3 billion in its heyday.

Another strong bidder, American private equity firm JC Flowers, also pulled out of the auction last week, and it is looking increasingly unattractive to potential bidders as its value drops and its debt to the Bank of England rises.

It's value has also caused it to be ejected from the FTSE 100 this week, along with six other companies which include Barrett Developments, Tate & Lyle, high street retailers DSG International and pub operators Punch Taverns and Mitchells & Brothers; the biggest shake up in the blue-chip index since the dotcom bubble burst in the 1990s is reflective of the credit squeeze and the expected slowdown in the UK economy.

Senior City figures are growing increasingly pessimistic about the bank's future and prospects of a viable take over, which is putting pressure on the Government to nationalise the bank. This would see an end to the uncertain situation, but could be political suicide as it sends out very negative signals about the British financial system and regulation.

© Fair Investment Company Ltd