Rock to go for a song?
The clever lads at FT Alphaville have got hold of the sale memorandum for Northern Rock and put it on their website.
And – curses – it doesn’t include the one really vital piece of information for any bidder, which is precisely what the Rock is paying for its Treasury-backed loan from the Bank of England.
The Government, I am told, regards this detail as too sensitive even to tell prospective purchasers.
All the document says is that "any potential purchaser/investor... will need to have discussions with the Bank of England and its advisers before concluding any proposal."
Too right they will.
The value of the business for shareholders depends almost totally on the length and cost of this borrowing facility.
What the sale memo does disclose is that the Rock expects to have borrowed £24bn from the Bank as of Jan 1 2008 (though, curiously, the Bank of England believes it may well have lent £30bn by then).
The memo talks about this loan being refinanced – though it is not explicit about whether such a refinancing would continue to involve Government support.
However those involved in the sale process tell me it is simply impossible for this facility to replaced by a pure commercial deal in the foreseeable future.
So we are talking about the Government loan rolling on to the horizon. And according to the sale memo, even in 2010 the Rock will need to be in receipt of £6bn from what it calls a Replacement Facility – which, as I say, is in effect the current Bank of England loan by a different name.
Anyway, the memo outlines three possible different destinations for the Rock:
• sale of the whole company;
• sale of the basic physical infrastructure of the business, viz. the branches, IT and call centre, which might or might not also include Northern Rock’s £13.5bn of retail deposits and matching assets;
• sale of the infrastructure plus all those securitised mortgages, leaving behind a rump of assets and liabilities for orderly run-off.
Now, it looks to me as though the jobs of most of the Rock’s 6,000 employees should be retained, under these scenarios.
But if I were a Northern Rock shareholder I would be alarmed, because the possibility of retaining the Rock as a listed company in its current form is simply not mentioned as an option.
And the point about the status quo is not that it is necessarily the best option. But you would expect it to be the base case for any examination of what should happen to the company – such that any deal would only be done if it created more value for shareholders than sustaining the current structure and ownership.
The implication therefore is that Treasury simply wants to get shot of the business – though it would deny any such intention, largely because it can’t be seen to be pulling the strings for fear of being forced to take more formal responsibility for the Rock’s welfare as a shadow director.
Also it won’t wish to be seen to be short-changing the 150,000 or so small shareholders in the Rock, many of whom acquired their shares when it converted from a building society and saw their stake as a retirement nest egg.
But the contents of the sale memo imply that the initiative put forward by Luqman Arnold and his Olivant financial business is going nowhere. This credible former boss of Abbey National and UBS believes he can stabilise and grow the Rock as a going concern. His plan would be to retain the Rock’s listing and inject some new capital into it in return for a stake of less than 20 per cent.
Unsurprisingly, a number of the Rock’s larger shareholders – including the hedge fund, RAB – believe Arnold deserves a proper hearing. So they won’t be pleased if he’s already been effectively ruled out.
In the memo, the Rock is given the cutesy codename "Blackbird". Its shareholders will hope that’s not because a decision has already been taken that this bank is going for a song.