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Virgin confirmed as preferred bidder for Rock

26/11/2007 12:59
Sir Richard Branson’s Virgin group on Monday was confirmed as the preferred bidder for Northern Rock as the stricken mortgage lender said it wanted to take forward discussions with the Virgin team “on an accelerated basis”.

In a statement, Northern Rock said that under the Virgin proposal, £11bn of the more than £20bn that the bank has borrowed from the Bank of England would be repaid in full upon completion of the deal, with “a clear path towards repayment in full.”

All interest accruing to Rock’s financing sources, including under Bank facilities, would be paid in cash rather than rolled-up for payment in due course, it added. Additional “substantial funding facilities” would be put in place to ensure “appropriate financial flexibility”.

Virgin said it would inject £1.4bn of cash, and its Virgin Money subsidiary, for a fully underwritten issue of new ordinary shares to existing holders, to be offered on a pro rata basis at 25p a share. Virgin’s injection would be on the same terms and would see the group hold not more than 55 per cent of Northern Rock if the offer was fully taken up, it said.

Northern Rock shares jumped 25 per cent to 107p in early trading on Monday

Bryan Sanderson, Northern Rock chairman, said: “This is very good news for Northern Rock. Over the last few weeks and months we have looked at the issues from the perspective of all stakeholders. I am grateful for the support that we have had from customers and employees who have stayed loyal to us during these difficult times - and pleased that a solution that firmly restores the company’s prospects has been identified. Furthermore our retail depositors can be fully reassured that the government has said it will ensure savers’ money is safe whatever the outcome.”

The decision comes as Alistair Darling, chancellor of the exchequer, faces growing pressure to solve the Northern Rock crisis. If a deal cannot be completed, Northern Rock will have to be nationalised or put into administration.

In order to succeed, Virgin must finalise the financing for its bid and win the support of shareholders, who will be heavily diluted under the proposed deal. A rival bid by JC Flowers, the US buy-out firm, remains on the table and could be revived if Virgin stumbles.

Virgin was selected after an intense weekend of discussions between bidders, Northern Rock’s board of directors, and the tripartite authorities – the government, the Bank of England and the Financial Services Authority. According to people close to the talks, the government was particularly keen to stress-test the bids to make sure there was little chance of Northern Rock failing again in the future.

The Virgin consortium, which includes Wilbur Ross, the US distressed debt investor, hedge fund Toscafund and First Eastern Investment Group, was considered more attractive by the government because it would immediately repay more than £10bn of Northern Rock’s debt, while treating the government as an equal creditor, people close to the talks said.

JC Flowers had proposed repaying £15bn up front, but would have ranked the government’s remaining claims behind those of commercial banks. In addition, JC Flowers’ proposal would have offered shareholders a ”nominal” sum to buy their shares.

It is unclear whether Northern Rock shareholders will approve the proposed Virgin deal or hold out for better terms by threatening to vote down the proposal. Olivant, the private equity firm led by Luqman Arnold, the former chief executive of UBS and Abbey National, is this week expected to press the tripartite authorities to abandon the planned sale, in favour of turning around Northern Rock.

Olivant is proposing to parachute a management team into the bank while taking a 15 per cent stake in the business. Olivant plans to immediately repay £10bn-£11bn of the government’s loan, and return the rest within about two years. Under this plan, Northern Rock would raise about £600m through a rights issue, with Olivant contributing about £200m.

Under the Virgin proposal, an new management team would be put in place, to include Sir Brian Pitman, former chairman and chief executive of Lloyds TSB, as chairman; Jayne-Anne Gadhia, chief executive of Virgin Money, as chief executive; and Sir George Mathewson, the fomer chairman of Royal Bank of Scotland, as senior adviser. Sir George is chairman of Toscafund.

Virgin said it would rebrand Northern Rock as Virgin Money but added that it had “no current intention” of making any immediate job cuts at Northern Rock and would continue to operate the group from Newcastle-upon-Tyne.

It also envisaged continued support for the Northern Rock Foundation, the charitable body, saying it would contribute £10m in every year that Rock’s pre-tax profits exceeded £638m, up until 2015.

Virgin also made clear that “the private sector debt financing must be comparable in scale to any public sector debt financing required”, following Mr Darling’s vow earlier this month to veto any bid that failed to safeguard the taxpayer loans to the lender.

It also said that “returns on equity investments made by members of the Virgin consortium and other holders of ordinary shares must be restricted until the public sector loans have been paid back with interest and all other public sector commitments are at an end.”. That implies that there will be no immediate resumption of dividend payments to shareholders