Northern Rock shares drop on low-ball bids

The UK Treasury has made clear it can offer no guarantee of prolonged funding, causing potential bidders to make cautious indicative offers.

UK bank Northern Rock's share price has fallen again on revelations that indicative bids received over the weekend were “materially below the market price at the close of business'' on 16 November, according to a statement by the bank.

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The UK Treasury has also confirmed the £25 billion ($51 billion) loan from the Bank of England won't be extended indefinitely. This has limited the value of potential bids for the UK bank that was rescued out in September after a jump in credit costs made its financing model unsustainable.

Potential bidders “should not assume at this stage that the current Bank of England loan facilities will be available'' beyond February, the Treasury said in a statement today. 

The bank's shares fell by as much 24 percent in London. They were down 21.2 pence to 111.4 pence at 12:20 GMT.  The bank's market value has plummeted to £440 million from £2.7 billion in August, when it requested support from the UK’s central bank.

Any bid for Northern Rock that requires public money “will be evaluated on its merits against the authorities' stated objectives,” the Treasury said.

Northern Rock expects “further expressions of interest in the next few days”.

Blackstone Group, Citigroup, and Merrill Lynch, the bank's advisers, have begun talks with bidders to clarify the proposals and are also in discussions with financiers regarding refinancing and reorganising the company, Northern Rock said.

The company has received proposals which range from investing in the bank to acquiring different parts of its business, it said.

Branson's Virgin Group and Olivant Advisers, led by former chief executive of UK bank Abbey Luqman Arnold laid out rival indicative offers for the bank on 16 November.

Branson, backed by investors including American International Group, yesterday said it would pay about £10 billion of the bank's credit line to the Bank of England upfront. Royal Bank of Scotland Group and Citigroup are in the funding syndicate for Virgin's bid, Branson said yesterday.

Olivant wants to keep the bank's brand and invest a minority stake. JC Flowers, the US buyout firm, is also thought to have shown its interest with a team led by Paul Myners, the former M&S chairman. Northern Rock’s chief executive stepped down on Friday.

The UK Treasury said in a statement “the principles clearly state that interested parties should not assume at this stage that the current Bank of England loan facilities will be available beyond either any sale or the expiry of the facilities in February.” Beyond this date, the continued support of the UK government could constitute illegal state aid.

However, it said it was willing to discuss any proposals made along with the Bank of England and the Financial Services Authority, the so-called tripartite authorities.
It said: “Any proposal that envisages an ongoing role for the authorities, beyond their usual statutory and regulatory functions, will be evaluated on its merits against the authorities' stated objectives [to protect taxpayers; to promote financial stability; and to protect consumers].”