News that Sir Richard Branson’s consortium is the Government’s preferred bidder for Northern Rock (NRK) has boosted the bank’s sagging shares. He promises to revive its fortunes via a merger with his Virgin Money business, which the consortium values at £250m.
The consortium would inject £650m and raise £650m more from existing shareholders, who would pay 25p per share for a 45% stake in the new entity.
But the deal isn’t done yet: Jon Wood’s SRM hedge fund has raised its stake to 8.5% in “a clear power play” to cajole the board into considering other suitors, said the FT.
Is it a good deal?
It’s an “elegantly structured proposal” compared with approaches from JC Flowers, which wanted to take the business off the stockmarket and Luqman Arnold’s, which lacked detail and firm funding, said Patrick Hosking in The Times. The brand, “may just have the consumer appeal to restore depositor credibility” to Northern Rock.
Still, Branson’s consortium will only initially return £11bn to the taxpayer, although a “vague assurance” that the other £12bn will follow over the next three years seems “to have satisfied the Treasury”, said The Guardian. The Government is keen to get the Rock off its hands after a nightmare week.
Unfortunately, Branson’s plan for the bank depends on the economy performing as well over the next two years as it did in 2007, said Larry Elliott in The Guardian. That seems unlikely. The danger is that this deal will “blow up in the Government’s face” as risky mortgages provided at the top of the market are hit by a housing market downturn.