The Wall Street Journal-20080205-Edge for Northern Rock Moves to Branson-s Virgin
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Edge for Northern Rock Moves to Branson's Virgin
Full Text (708 words)LONDON -- British entrepreneur Richard Branson's Virgin Group got a leg up in bidding for British lender Northern Rock PLC yesterday after rival Olivant Advisers, an investment group, decided not to bid at the last minute.
The surprise decision by Olivant, led by veteran British banker Luqman Arnold, leaves Virgin and a bid from Northern Rock management the only two remaining options for a private sale of the bank as of yesterday's deadline for bids in the protracted auction.
The U.K. government is seeking a buyer for Newcastle, England-based Northern Rock after lending the bank about GBP 24 billion ($47 billion) since September. 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.
The government, which will have the final say on who runs the bank, has made it clear that its priorities are to protect taxpayers and consumers and promote financial stability. The U.K. government will chose among the bids, and the proposal it selects will be put to the bank's board, which will put it to a shareholders' vote. If the government is unable to find a private buyer, it will have little alternative but to nationalize the bank.
A representative for the Treasury declined to comment yesterday.
Northern Rock ran into trouble in September when its sources of funding dried up as the global credit crisis roiled the markets. Since then, handling the hobbled bank has become an embarrassment for the government of Prime Minister Gordon Brown. A parliamentary committee faulted regulators over handling recently.
Olivant said it decided not to bid -- even after laying out a proposed bid to buy the bank in November -- because it couldn't come up with an offer that met its investment criteria while also meeting the government's required financing terms. The Treasury is offering a funding package that includes placing a government guarantee on new bonds that would be issued by the mortgage lender. In exchange for the guarantee, the government would receive fees and a share of Northern Rock's potential equity returns.
While the bidders need to win over the government, the bank also will need shareholder support for whomever the government selects. In recent weeks, the bank's two largest shareholders, SRM Global Fund and RAB Special Situations, collectively holding 18% of the stock, had supported Olivant's effort.
RAB yesterday said it now would back Northern Rock management's bid. "We've always said that we want to see a strong and independent solution for Northern Rock," said Philip Richards, manager of the RAB fund and chief executive of RAB Capital PLC. "There is only one strong and independent solution available, in the shape of the proposal from the Northern Rock team."
SRM Global Fund, Northern Rock's biggest shareholder, with more than 10%, wasn't available to comment.
The Northern Rock management group said it submitted its proposal, which would be conditional on the European Union's approving continued state aid to the bank. Under its proposal, Northern Rock would raise new equity of not less than GBP 500 million. It would reduce the assets held on the balance sheet, and it would reorganize its operations.
Virgin's proposal calls for a capital injection of GBP 1.25 billion of new equity structured as a GBP 500 million cash injection from Virgin Group and its fellow investors, a contribution of GBP 250 million from Virgin Money, the group's banking unit, and a rights issue of GBP 500 million priced at 25 pence a share. Shareholders would have the right to buy about 4.7 new shares for each of their shares.
"Only with this amount of capital can we be satisfied that the business could survive a recession and there be no 'Northern Rock Mark 2,'" said Jayne Anne Gadhia, head of Virgin Money and proposed chief executive of Virgin Bank, the entity under which Northern Rock will be rebranded if Virgin's proposal is successful.
Northern Rock's shares dropped sharply after the announcement of Olivant's withdrawal to trade at 95 pence down, from 101 pence immediately before the announcement. They finished the day down eight pence, or 8.3%, at 88 pence.
