Business View: How hedge fund bad guys became heroes

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The Independent Online

The battle for Northern Rock is going to be a lot closer than recent Newcastle United home fixtures. Although JC Flowers, the US private equity group, made noises that it might pull out of the auction for the ailing bank, Virgin's bid, which has been given preferred status by the Rock's board, may face a stiff challenge from Olivant, the investment vehicle set up by former Abbey National boss Luqman Arnold.

Olivant is putting together the finishing touches to its formal offer for the bank and is close to securing the necessary finance to pay back some of the 26bn loaned to the Rock by you and me via the Bank of England. I am told that the offer could land on the doormat of Blackstone, the rock's main financial adviser, by Tuesday or Wednesday.

Olivant is prepared to take a large minority stake in the Rock by buying shares on the open market a result that will be better for shareholders than the proposal from Sir Richard Branson's Virgin group. At time of writing, Olivant had yet to secure the required 10-12bn or so it needs in financial support to proceed with its offer. However, the mood music seems to suggest that if Virgin can get the required backing from the banks, then there is no reason why Olivant will face any difficulties.

As I have pointed out in previous weeks, it is the shareholders in Northern Rock who remain in a powerful position. They have to agree to the takeover of the company they own. They are willing to bet that the Government will not risk the political fallout of putting the Rock into administration an option open to the Treasury if investors reject a rescue plan for the bank.

Happily enough, the interests of the hedge funds, led by RAB Capital that have piled into the Rock's share registry in the hope of making a quick buck, and those of small retail investors, are aligned. Hedge funds that have invested in the Rock are taking the moral high ground by complaining bitterly that the board of the bank and the Government are riding roughshod over the interests of shareholders. Well boo hoo! These funds knew the risks of investing in a bombed out business like the Rock, so I am not going to sympathise with their plight now. But they are inadvertently helping out the little guys here, so one should not be too hard on them. It is funny how yesterday's villains become today's heroes.

Erskine's progress

Peter Erskine, the chief executive of O2, owner of the best known moustache in the City, and responsible for the transformation of the company from unwanted BT cast-off to a world class mobile operator, stepped down last week from the board of Telefonica, the Spanish group that acquired its UK rival two years ago.

On the many occasions I met Erskine, I was always impressed. He has a rare ability to focus on the job at hand, without being distracted by the mewing of institutional investors or those in the City who think they know better. Although he remains on the Telefonica payroll in an advisory capacity, it won't be long, I'm sure, before he emerges on the board of a FTSE 100 company. Rumour has it he is looking for a non-executive role, and I am sure he would make an excellent chairman. But I wonder whether he might be tempted to take a chief executive's position if the right opportunity arose.

Ben Verwaayen, BT's chief executive, is going to step down in the next year or so. Ian Livingston, BT's group finance director, is the hot favourite to succeed Verwaayen, but Erskine might be in with a shout if he wants the job. It would be the return of the prodigal son and a fitting final job in a career that has sparkled over the past decade. And if Arun Sarin, Vodafone's chief executive ever decides he wants to return to the US, Erskine would be top of any headhunter's list.

What next for the City?

The past 12 months in the City has been a time of great change. London has established itself as the foremost financial capital in the world and the money it has brought into the UK has helped to fuel this country's economic growth. It has its detractors and of course its top guns are paid an obscene amount of money.

Private equity dominated proceedings but has been brought to heel by a combination of market conditions and a political backlash. Hedge funds have consolidated their position as market movers and capital has flown into the Square Mile from the four corners of the planet. As a financial centre, I don't think London has ever had it so good.

From the perspective of a financial journalist it has been a fascinating evolution to observe one filled with stories of interest to all newspaper readers. What will 2008 hold? I am confident that times are going to get tougher not just for City folk but for most of us. If the housing market does not go into reverse, there is sure to be some sort of correction. The impact of that will reverberate across the economy.

The economic tide is turning and we all have to be careful not to get caught out of our depth.

This is my last week at the paper. It's been fun.

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