Investment Markets » Banking and Finance
Branson To The Rescue?
Virgin's offer for the Rock ticked most of the right boxes for the Government, but it is far from being a done deal.
The world is divided into optimists, pessimists and Bransonists. Optimists believe the glass is half full. Pessimists believe it is half empty. Bransonists believe it doesn't really matter how much is in the glass: if it's got the Virgin brand on it... you'll drink it.
The Virgin-led consortium's emergence as the preferred bidder for Northern Rock is a quintessential Bransonistic brand-for-equity swap and looks, on paper, like a good deal for the grinning knight. The broad terms are that the consortium will repay £11bn of the Rock's debts immediately and a further £11bn within three years.
In return, Sir Richard, who wants to use the re-branded Northern Rock to challenge the four big high street banks, gets a business that would have cost him £5.2bn before the crisis, 20 million customers, and a sizeable mortgage book.
Sadly, but inevitably, the hit to shareholders is radical. Of the £1.05bn of cash being injected into the Rock, Branson expects existing shareholders to chip in the bulk – £650m. If they don't, they end up with only 6% of the newly structured bank; even if they do choose to risk throwing good money after bad, they still surrender control, ending up with just 45%.
But you can see the attraction for the Government. The Virgin bid avoids huge redundancies and, by offering shareholders a severe haircut rather than a scalping, is unlikely to mean a repeat of the legal action that followed the decision to pull the plug on Railtrack. Even so, taxpayers aren't off the hook. Questions still remain about the strength of the Virgin Money management team led by Jayne-Anne Gadhia. But the major doubt is over what will happen if the UK housing market takes a tumble and the new, much enlarged Virgin Money can't make it's repayments.
Ministers will take the flak if it turns out Branson got the Rock for a song and made millions from it; but the fallout from another excruciating rescue would be even worse.
For now, the question is academic. Government hopes of a quick exit solution have been scuppered by a shareholder rebellion staged by hedge funds SRM and RAB Capital, who hold 15% of the stock and are determined to block Branson's bid. Other shareholders are backing a rival plan led by Olivant, the private equity group headed by former Abbey boss Luqman Arnold.
Branson's bid is very far from being a done deal. If anything, the battle for Northern Rock appears to be intensifying.
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