Virgin is preferred Rock bidder
Sir Richard Branson’s consortium has taken a huge lead in the contest to acquire Northern Rock, the troubled mortgage bank.
I have learned that the Rock wants to name it as the preferred bidder, although an announcement is being delayed pending formal approval by the Treasury.
If that approval is given, an announcement will be made early tomorrow morning.
Right to the last, the Treasury has been considering a radical alternative, which was to nationalise the bank. But it appears to have decided that taxpayers' interests are more likely to be protected by a private-sector solution.
However, if the Rock’s shareholders were to complain that they are not being offered enough by Virgin, which seems likely, the company and the Government are likely to make it clear that the alternative would be to put the bank into administration under insolvency procedures.
If the Rock went into administration, shareholders might end up with nothing.
There have been around 10 expressions of interest from financial institutions in the possible takeover of the Rock.
In the end, it came down to a two-horse race, between the Virgin team and a proposal made by JC Flowers, the US private equity house that specialises in the takeover of banks.
Their advantage over other possible bidders is that their plans were far more advanced – and the Treasury was insisting on a swift decision.
The Treasury’s central concern is to secure repayment of an estimated £25bn of taxpayer-backed loans to the Rock made by the Bank of England.
Virgin is proposing to raise between £10bn and £15bn of loans from a syndicate of banks led by Citigroup, Royal Bank of Scotland and one other unnamed bank – and would use the proceeds to repay some of the money owed to the Bank of England.
As for Flowers, it plans to raise £15bn from a similar group of banks (its syndicate is led Citi, RBS and JP Morgan) for the same purpose.
The Rock board preferred the Virgin proposal largely because it was offering more to the bank’s existing shareholders.
Both Virgin and the Rock would pump around £1bn of new equity capital into the bank, thus diluting existing shareholders.
But Flowers put a negligible value on the Rock’s shares and was told to go away and come back with a better offer.
Under the Virgin scheme, the Rock’s shareholders would retain around a third of the Rock and would also receive a share of any future gains made by the new owners.
Virgin’s proposal also had several other significant presentational advantages: it would continue to make a modest annual contribution to the Rock’s charitable arm, the Northern Rock Foundation; and it would guarantee a proportion of the Rock’s employment.
If Virgin emerges as the new owner, the Rock will continue to benefit from taxpayer backed loans running to billions of pounds for two or three years. It is believed that these would get around a European Union prohibition on state aid by being reconstructed so that they would be identical in every way to the new commercial bank loan: the interest rate would be the same; and they would be backed by identical collateral.
UPDATE 18:51 The Treasury has said yes. So the Rock will announce that Virgin is the preferred bidder tomorrow.
Here are some additional details:
1) The Virgin consortium will repay £11bn of taxpayer-backed loans from the Bank of England on the day the takeover of Northern Rock is formally completed.
2) A similar size loan from the Bank of England will remain in place. It will be on exactly the same terms as the commercial loan – arranged by Citigroup and Royal Bank of Scotland – that the Virgin consortium is arranging to refinance part of the taxpayer loan. So the Treasury is confident that the continuing Bank of England loan will not be viewed as illegal state aid.
3) Virgin has agreed it will only pay itself “normal” dividends from Northern Rock until all public money is repaid – thus avoiding the potential embarrassment for the Treasury of the Virgin making spectacular profits with the help of the taxpayer-backed loan.
4) The Treasury will give three-months notice before withdrawing 100 per cent protection for the Rock’s depositors.