News & Analysis

Rock nationalisation ends bidders’ hopes

The struggling UK bank’s nationalisation is despite interest from various bidders including distressed debt investor WL Ross as part of the Virgin consortium.

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The UK government has decided to bring forward legislation enabling it to nationalise the struggling UK bank, according to a statement.

Northern Rock:
to be nationalised

The decision was made after consultation with the Bank of England and UK regulator the Financial Services Authority. The government’s financial advisor, US bank Goldman Sachs, concluded: “A temporary period of public ownership better meets the Government's objective of protecting taxpayers.”

The decision was made after two private sector bids were tabled earlier this month. One bid was made by a consortium led by UK billionaire Richard Branson’s Virgin Group, which included distressed debt investor Wilbur Ross, the other came from Northern Rock’s management.  

The government said both proposals involved too much risk for taxpayers in exchange for significant implicit subsidy from the Treasury.

The government provided the bank with more than £20 billion ($39 billion; €26.6 billion) in loans after its funding lines were cut following the problems in worldwide credit markets which began in August last year.

The Virgin consortium’s proposal would have only led to a return for the government if the value of the business to its investors had reached at least £2.7 billion.

Management’s proposal was felt to have been higher risk for taxpayers as it brought in less external capital.

The subsidy would be provided “in circumstances where the private sector rather than the taxpayer would secure the vast majority of the value created over the period ahead. This would be a poor reflection of the balance of risk borne by the two sides. “

Other private equity bidders for the bank included UK investment firm Olivant and US buyout firm JC Flowers. Olivant decided not to table an offer at the eleventh hour having secured preferred bidder status alongside the Virgin Consortium in December. JC Flowers opted not to increase its original indicative offer for the bank in December last year having  been outbid by the Virgin consortium.