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The race is on for Northern Rock as JC Flowers quits, Virgin battles to secure funds and Luqman Arnold submits new proposal

07 December 2007 / by None
JC Flowers – the private equity firm – has pulled out of the bid auction for stricken bank Northern Rock.The US group, which first submitted a takeover bid in October and put in a revised proposal last week, is believed to have refused to bow to Chancellor Alistair Darling's demands that Northern Rock's shareholders should share in any future recovery.

JC Flowers' bid included practically nothing for shareholders, due to the fact that Northern Rock was being held together by Government money and the firm believed that rendered the shares 'virtually worthless'.

The move leaves Sir Richard Branson's Virgin Group in pole position, although it is still in talks with a consortium of banks led by Deutsche, Citigroup and RBS – over the £11 billion loan it needs to fulfil its promise to repay large portion of the emergency funding Northern Rock received from the Bank of England.

The other top runner is Olivant, led by Luqman Arnold, who this morning announced it has made fresh proposal which would see it join with Northern Rock as a significant shareholder through "immediate introduction of expertise appropriate to the struggling bank's current position".

The rescue bid would see Olivant invest £150million in cash, arrange a rights offer for as much as £650million and would enable Northern Rock to quickly repay between £10billion and £15billion back to the of Bank of England, with the entire £25billion to be recovered by the end of 2009.

"It is time for all stakeholders to work together to ensure prompt and full repayment of the Bank of England facility and to set Northern Rock back on course for a successful and independent future," said Arnold.

"We believe that this proposal satisfies the requirement of all stakeholders, including the Tripartite Authorities' principles for assessing Northern Rock proposals, whilst confirming the broad and constructive support from shareholders."

But banking sources are sceptical about whether the bid will win recommendation, arguing that Luqman will need to increase the amount he is planning to invest into

Northern Rock, and with the Government desperate to find a private buyer, they may have to reconsider privatisation. Analysts are saying that no commercial group will be able to make a takeover work, with one senior banker telling the Telegraph "There is no option but to nationalise it because of the broader instability it is causing to the financial system."

Northern Rock was one of the biggest casualties of the global credit crunch due to its investment into the US sub prime mortgage market; Alliance and Leicester and RBS were also hit hard. Today, RBS Chief Executive Sir Fred Goodwin revealed that RBS has had to make £1.5billion of write-offs, but defended the company's investment into sub prime.

© Fair Investment Company Ltd