Richard Branson’s Virgin Group submitted a formal bid for proposal for Northern Rock PLC on Monday, taking pole position for the stricken mortgage lender after private equity firm Olivant pulled out of the race.
Virgin said it plans to inject $2.5 billion of new equity into Northern Rock and take a 55 per cent stake in the lender as part of its rescue plan for Britain’s biggest casualty of the global credit crisis.
“We have made a proposal that seeks to stabilize the company and rebuild it as a trusted and thriving institution under the Virgin brand with a long-term future,” Brian Pitman, the consortium’s proposed chairman of what would be called Virgin Bank, said shortly after a government-set deadline for bids passed.
“The proposal is a sound public-private solution for Northern Rock that will see taxpayers interests protected and give existing shareholders the opportunity to invest alongside and at the same subscription price as the Virgin Consortium,” he added.
Virgin said the new equity would comprise a $988.6 million cash injection from the consortium partners, a $494.3 million contribution from Virgin Money and a rights issue of $988.6 million priced at 49 US cents per share.
“The consortium believes that the company must be strongly capitalized to withstand the full effects of potential adverse market conditions,” Virgin said.
Virgin’s formal bid, which was largely unchanged from a preliminary proposal it made last year, came shortly after Olivant pulled out the bidding.
“Despite working intensively, we have been unable to formulate a value creation proposal which meets our investment criteria whilst also respecting the government’s proposed financing terms and the interests of other stakeholders in the company,” Olivant Chairman Luqman Arnold said in a statement.
Many shareholders had expressed support for Olivant’s preliminary offer, which had involved a capital injection of up to $1.6 billion via a rights issue and taking a 15 per cent stake.
Shareholders were less happy with Virgin’s bid because of the rights issue, which would dilute their holdings while giving it more than half the business. Hedge funds RAB Capital and SRM Global, which hold 18 per cent of the mortgage lender between them, have indicated they would vote against the Virgin offer.
The government has final say in any sale, but is expected to take shareholders’ views into account to speed up the process and help ensure that investors will stump up for the rights issue that forms part of each bid.
The government is keen to find a buyer for Northern Rock and draw a line under a crisis that led to Britain’s first bank run in more than 150 years and damaged the credibility of both Prime Minister Gordon Brown’s government and the financial authorities.
The Treasury set Monday afternoon as the deadline for bids after announcing last month that it would issue state-guaranteed bonds to repay billions of pounds in emergency loans from the Bank of England.
Northern Rock was also expected to lodge an in-house proposal, but made no immediate statement.
The Treasury, which has said that nationalization remains an option if a private bid is not deemed suitable, must make a decision this month in order to apply to the European Commission to turn the Bank of England emergency funding into restructuring aid.
The government must get approval from the EU on a new arrangement by March 17, when approval ends for the current emergency funding.
The government’s plan to issue bonds significantly reduces the capital prospective bidders would need to raise as they will no longer face an obligation to pay back the more than $49 billion that Northern Rock has borrowed from the Bank of England after short-term money markets dried up in the late summer.
Investors are pushing for a private deal because they would likely receive very little - or nothing - for their investment if the bank is taken into state control. (AP)
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