Branson's big bet
Having received the thumbs-up from Northern Rock’s board, will the consortium led by Virgin actually carry off Northern Rock? Or will the battered bank’s shareholders reject his offer?
Well, on the plus side for shareholders is that Branson is offering them the opportunity to subscribe new capital into the Rock on the same terms as he would do.
He proposes to inject around £1.3bn of cash into the business in return for new shares priced at 25p each.
All of these will be underwritten by the Virgin consortium, so the money would be guaranteed.
But the Rock’s existing shareholders would be given the chance to buy half of them.
On the basis that the existing Rock business is valued at around £200m – considerably less than the current market valued of £362m – and that Virgin Money (which would be injected into enlarged bank) is valued at £250m, Branson’s group of investors would end up with 55 per cent of the bank, leaving current shareholders with 45 per cent.
Here’s what it means:
1) Branson is putting a negligible value on the Rock in its current mess;
2) But he is giving shareholders the opportunity to obtain a good chunk of the gains, if he turns it around.
What is perhaps encouraging is that Branson himself will have a good deal of skin in the game (to use the City cliché). I am told he is putting more than £200m of his own cash into this deal.
What are the alternative for shareholders? Not happy ones.
They are either nationalisation of the bank, or the placing of it into administration under UK insolvency procedures.
And both of those would probably mean that the value of the shares would be wiped out completely and there would be no chance of rebuilding that value through the commitment of new capital.
As I said last night, the Treasury has given its approval of the Virgin offer.
What’s in it for taxpayers?
Well, after £11bn of the taxpayer-backed loan from the Bank of England is repaid, a residual loan will be reconstructed so that it is identical in every way to a new loan provided by commercial banks (this new loan is being provided by banks led by Royal Bank of Scotland, Citigroup and Deutsche Bank).
The taxpayer loan and the commercial loan would charge the same interest rate. And they would be backed by identical collateral.
The Treasury is confident that on this renegotiated basis, the taxpayer loan will not be seen as illegal state aid by the European Commission.
But there are residual risks for the taxpayer.
Branson plans to pay off the public purse over two to three years. If there were a severe housing market recession in that period, we might not get all our money back.
However the equity he is putting into the business – including more than £200m of his own money – would be wiped out in those circumstances.
In other words, he could not profit from our misery, even though some will doubtless accuse the Treasury of using our money to help him make spectacular potential long-term gains.
UPDATE 3:30 PM - I have now spoken to Philip Richards at RAB and - contrary to some reports - he is opposing Virgin's takeover offer. He says the value it puts on Northern Rock is "too low" and he describes the bid as "cheeky".
His opposition represents a major obstacle for Virgin and an embarrassment for the Rock board.
Opposition to the deal may now be from shareholders controlling around 15% of the shares. RAB has 6.7%. But the biggest shareholder is now another hedge fund, SRM, which was buying Rock shares in the market on Friday and again today. SRM, which may now own more than 7% of the Rock, is also thought to oppose the Virgin deal.