Northern Rock names Virgin Group as most likely suitor

26 November 2007
Northern Rock has named the Virgin Group as its favourite contender in the bidding war which has emerged for the stricken bank.

In return for a 50 to 60 per cent stake in the company, Virgin are offering to pay £11 billion back immediately to the Bank of England towards the loan which is currently running at more than £25 billion, and to provide a strict timeframe in which the remaining debt would be repaid over the next two years.

The process of finding an investor has been accelerated as a result of growing concerns that the longer it takes to find a viable solution, the less Northern Rock's shares will be worth, and the less attractive it will appear to potential buyers. Virgin intends to raise half the money they need for a £1.3 billion cash injection into Northern Rock from its consortium of investors, and the other half by extending an offer to existing shareholders at 25p per share.

Already, Northern Rock's value has fallen to £362 million, with shares closing at 86p on Friday night, compared to the £12 they were trading at earlier this year. Shareholders have been shaken by Virgin's proposal, which values the company at just £250 million. Shareholders could cause problems by blocking the deal which will see shares drop to between 20p and 40p.

However, the Virgin bid, unlike other bids such as that from JC Flowers, will allow shareholders to retain a stake in the bank, and it is thought to be favoured by the tripartite regulators – the Treasury, Bank of England and the Financial Services Authority –

because it vows to repay a large proportion of the taxpayer's money straight away.

Shareholders are demanding that they be given a say in determining the bank's fate and are advocating a take-over by fellow bidder Olivant, which will see a bigger return for shareholders and a quicker repayment of the debt, but only plans to repay £5.5 billion to the Bank of England immediately.

If Virgin is successful, Northern Rock will not be broken up, but it will be re-named Virgin. Virgin says it has no plans to make any job cuts and intends to keep the business in the North East of England. The Northern Rock Foundation – a charity set up in 1997 when the company lost its mutual status – will also continue to receive funding from the organisation.

Should the Virgin deal turn sour, there are several other options available to the struggling bank that has been hit hard by the US sub prime mortgage crisis, such as the rival bid from JC Flowers which remains on the table, and a new offer from American investor Warren Buffett who has become legendary for his successful track-record in investment, and would like to join one of the consortia bidding for Northern Rock.

Shares have risen considerably since the it became known that Virgin is looking like the most likely outcome for Northern Rock, and confirmation is expected today.

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