Virgin seems likely victor in race for Northern Rock

05 February 2008 / by Rachael Stiles
Alistair Darling's hopes for a competitive bidding war were dashed yesterday with the withdrawal of Luqman Arnold's firm Olivant from the race for Northern Rock, leading many to believe that Virgin is now the most likely successor for management.

Olivant pulled out less than five minutes before the Government-enforced deadline for proposals yesterday, citing an inability to formulate a plan which met with their own objectives whilst staying within the boundaries set by the treasury and respecting the interests of shareholders.

It is now thought that Virgin will revert to its lone preferred bidder status which it held before the Government brought Olivant to the same preference. Virgin was favoured because it was thought to be seen by the Government as the least likely investor to allow anther run on the bank, partly because it would re-brand it Virgin Bank.

Sir Brian Pitman, proposed Executive Chairman of Virgin Bank, said in a release yesterday: "We have made a proposal that seeks to stabilise the Company and rebuild it as a trusted and thriving institution under the Virgin brand with a long-term future. The proposal is a sound public-private solution for Northern Rock that will see taxpayers' interests protected and give existing shareholders the opportunity to invest alongside and at the same subscription price as the Virgin Consortium."

Upon the withdrawal of Olivant, however, shareholders RAB Capital took little time in throwing their support behind Northern Rock's grass-roots management proposal, led by Paul Thompson, which is putting Virgin's lead in question.

Shadow Chancellor George Osborne was quick to lay the blame on Alistair Darling for Olivant's desertion, citing his incompetent handling of the bid process as the main reason, but it is thought that the repayment of the Bank of England's £28 billion loan to Northern Rock was the predominant factor in Arnold's decision. Olivant wanted five years to repay the loan, but the Government has set a timetable of just three years.

The only two bids were made for the stricken mortgage lender, which fell foul to the American sub prime mortgage market, came from Virgin and Northern Rock's management. Virgin tabled a plan that would price shares at 25p and allow existing shareholders to subscribe for 4.7 new shares for each one they already own, taking a 55 per cent stake for itself.

The in-house management team proposed that it would reduce Northern Rock's reliance upon wholesale funding from 80 per cent and increase deposit-supported lending from 30 per cent to reach a 50-50 balance. Some fear that a drastic reduction in Northern Rock's business, which could also mean severe job cuts, will damage the business irrevocably and hinder future regeneration and growth.

The absence of a third bidder reduces the competition, but the Chancellor is still hopeful that other proposals will be made in the coming weeks, despite yesterday's deadline, which will strengthen his chances of negotiating a viable solution for Northern Rock which does not end in nationalisation.

© Fair Investment Company Ltd