Virgin Money faces uphill struggle, city warns

Virgin Money faces an uphill struggle to make a meaningful impact on British banking, despite buying Northern Rock for a knockdown £747m and earmarking a possible flotation for as soon as 2014, City analysts warned yesterday.

The deal is the first disposal of any part of the vast tranche of the banking industry taken into state hands during the financial crisis, although the price is £375m short of Northern Rock's net asset value of £1.122bn. The price could increase to £1bn depending on performance.

Sources close to the deal said that while the price, at 0.9 times "book value", represented a loss, it looked better when compared with most of the banking sector, which trades on the stock market at about 0.5 times book value.

Virgin Money's chief executive, Jayne-Anne Gadhia, said: "We feel we paid a very, very full price. From our perspective we have paid £1bn of value with £747m in cash, £150m of additional capital into the business and more dependent on performance.

"It is our ambition to float this business, not because our investors want an exit but to access growth capital at the same price as our competitors. I think this is an important step and gives us an opportunity to grow and a presence on the high street.

The "bad" part of Northern Rock, now known as Northern Asset Management and containing nearly all of the high-risk loans it advanced before the credit crunch, remains in the taxpayers' hands. Northern Rock's 75 branches will be rebranded as Virgin Money but its operations in Newcastle will be retained. The bank's market share is just 1.5 per cent of savings and 1.2 per cent of mortgages; as such, it barely scrapes into the top 10.

However, a combination with Virgin Money will create an entity with 4 million customers – one million of whom will come from Rock. It will rank as Britain's seventh-biggest lender. Further firepower will be added if Ms Gadhia can buy the UK credit-card business being sold by Bank of America.

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