The Wall Street Journal-20080116-Credit Crunch- Holder Vote at U-K- Lender Complicates Sale Efforts
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Credit Crunch: Holder Vote at U.K. Lender Complicates Sale Efforts
NEWCASTLE, England -- Two hedge funds agitating for a greater say over the future of United Kingdom mortgage lender Northern Rock PLC won a partial victory as shareholders voted to limit some of the board's power to negotiate a private-sector bailout.
The vote sent a message to Northern Rock's management and the U.K. government that shareholders won't accept any deal that would sharply devalue their holdings -- a message that could hinder the government's attempts to find a buyer. It stops short of a full confrontation with the government, which has lent around GBP 26 billion ($50.9 billion) to Northern Rock through the Bank of England, and has said nationalization is a possibility if a private-sector solution can't be found, potentially leaving shareholders with nothing.
At an extraordinary general meeting in the northern English city of Newcastle, shareholders approved one of four resolutions put forth by the two activist hedge funds, Global Master Fund and RAB Special Situations, funds of Monaco-based SRM Advisers and London's RAB Capital PLC.
As a result, shareholders now have the right to approve any significant issues of new shares. Three other resolutions -- which would have barred the company from selling or acquiring significant assets or changing its capital structure -- failed to meet a higher voting threshold of 75%.
"If all the hedge funds' resolutions had gone through, there was a chance that the government intervention would have taken one step closer," said Nigel Myer, a financial-institutions analyst at Dresdner Kleinwort in London. Now, he says, the outcome remains "firmly up in the air."
Northern Rock became one of the U.K.'s most visible victims of the global credit crisis in September, when news that it had turned to the Bank of England for emergency loans triggered the country's first bank run in more than a century. It has since become a political liability for the government of Prime Minister Gordon Brown, as the search for a private buyer has dragged on.
Both the government and the Bank of England have come under fire for their handling of the crisis, with opposition lawmakers saying that it has harmed London's reputation as a financial center.
A number of private-sector bidders have come forth to bail out Northern Rock, but only two remain. One bid from a consortium led by Virgin Group, which the mortgage lender's board has supported, would give Virgin a 55% stake in the bank but sharply devalue the holdings of existing shareholders. The other proposal, from independent investment group Olivant Advisers, would see the company take over management of Northern Rock with a stake of around 15%.
