Rock prefers Virgin, WL Ross consortium(2)

A consortium led by Virgin Group and including WL Ross has tabled a preferred bid for struggling UK bank Northern Rock. The bid provides shareholders with a way to benefit from the upside of any turnaround.

A consortium led by UK billionaire Richard Branson’s Virgin Group and including US distressed debt investor WL Ross has attained preferred bidder status in the battle for troubled UK bank Northern Rock, according to a statement by the bank.

Virgin Money:
Northern Rock may
be rebranded

The consortium also includes UK alternative asset manager Toscafund Asset Management and Chinese investment firm First Eastern Investment Group. 

The Virgin bid is being funded with £1.3 billion (€1.8 billion; $2.7 billion) of equity and will see the Virgin Money business, which is valued at around £250 million, rolled into Northern Rock.  The consortium plans to rebrand the business as Virgin Money and has invited existing shareholders to participate by providing half the equity at £0.25 per share.

The consortium will take a stake of up to 55 percent. It has guaranteed not to break up the business, which will continue operating from Newcastle-upon-Tyne in the North-East of England.

Northern Rock’s shares were up 28.87 percent to £1.11 at 1128 GMT today. 

Northern Rock’s board said it was taking forward discussions with the group on “an accelerated basis”. The decision came after discussions with the Tripartite Authorities [the Bank of England, HM Treasury and UK regulator the Financial Services Authority], it said.

The struggling bank has borrowed more than £20 billion from the Bank of England since its funding lines were cut off by the turmoil in the credit markets.

The statement said the Virgin consortium had made an indicative proposal to repay £11 billion to the Bank of England upon completion of the deal.  The statement said the proposal gave the Bank of England “a clear path towards repayment in full.”

The consortium will also put in place “substantial funding facilities” to ensure appropriate financial flexibility for the company going forward.

The rebranded business would be led by chairman Sir Brian Pitman and chief executive Jayne-Anne Gadhia. Pitman was formerly chairman and chief executive of UK bank Lloyds TSB while Jayne-Anne Gadhia is managing director of Virgin Money. Sir George Mathewson, the former chairman of UK bank RBS, would be a senior adviser.

The consortium said it was targeting a credit rating of at least A after building up the company’s deposit base.

The statement also said Northern Rock’s board had received an approach from more than 10 percent of shareholders to call an extraordinary general meeting on Friday should a indicative offer be tabled that would propose breaking the company up.

A city source said this was an attempt by hedge funds RAB Capital and SRM Advisers to pressure the board of Northern Rock to recommend an acceptable offer for shareholders.

As the Virgin bid did not seek to break up the company, the bid would not trigger the call for the EGM, the source said.

A consortium of banks comprising Citi, RBS and Deutsche Bank is offering to back any successful bid, according to a separate city source. The source said: “Nobody has committed facilities, they will only get this when they have a fully formed business case.”

The Olivant consortium, led by ex-Abbey and UBS chief executive Luqman Arnold, is due to meet the Tripartite Authorities in 48 hours, the source said. This offer would involve a management team headed by Arnold being parachuted into Northern Rock in exchange for a 10 to 20 percent stake.   

The source said that the Virgin consortium reportedly aimed to pay back the Bank of England by 2010, while the Olivant approach had a more accelerated repayment schedule.

Other bidders include US buyout firms JC Flowers, headed by ex-Goldman Sachs financier Christopher Flowers, and, reportedly, Cerberus Capital Management.