Business View: The Northern Rock auction: what a fiasco

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The Independent Online

Sorry, but just who is running the auction for Northern Rock? Is it the beleaguered bank's board? Is it their coterie of advisers – Citigroup, Merrill Lynch and Blackstone? Or is it Goldman Sachs, the adviser to HM Treasury? It might even be the FSA, the City watchdog. The trouble is, no one seems really to know.

Certainly not the bidders to buy Northern Rock, which include some American private equity groups and Virgin, headed by the ever-opportunistic Sir Richard Branson. One bidder told me yesterday that they are submitting their expression of interest to every single bank involved. The situation is not helped by the fact that Northern Rock's three advisers by all accounts hardly share the same view as to the best way forward.

Technically speaking it is up to the Northern Rock board to recommend an offer to shareholders. Ah, but hang on. The Government is owed over £20bn by Northern Rock. It is not going to accept any deal that jeopardises its chances of getting its, sorry, our money back. It can call in its loan when it chooses. But that would send Northern Rock into liquidation. The last time a situation was this sticky was when Winnie-the-Pooh got his head stuck in a jar of honey.

But before I come on to who I think holds the whip hand in this takeover farce, let us address the issue of whether Northern Rock should ever have been put up for auction in the first place. It is not a bankrupt bank. The reason it was unable to borrow the money it needed to cover its mortgage book liabilities was because its management team had about as much credibility as an England football team manager. But all the bidders are proposing to borrow up to £15bn to pay back Northern's government loan. Why can't a new management team do the same without the need to buy the bank first?

Anyway, that's now a moot point. So after a couple of months of wrangling, the board of Northern Rock and the Government will decide on a preferred takeover bid. What then happens if shareholders turn around and say no? The only recourse the Government has is to call in its massive loan. The result, Northern Rock is declared bankrupt and becomes Railtrack mark II. In one fell swoop, Gordon Brown loses all credibility he ever had in the City.

Government interference costs another company its life. And the losers are the poor old shareholders, including a huge number of small retail shareholders who find themselves at the bottom of the food chain once again. The investment banks won't care – they will have pocketed their multimillion fees already.

Perhaps one other option, one which was put forward on Friday by former Treasury minister Geoffrey Robinson, is for the Government to nationalise Northern Rock by making its own takeover offer for the bank. But even that would need the support of shareholders, unless the Treasury forces the bank into bankruptcy. If the Government did end up owning the bank it would in effect become a taxpayer-funded private equity player. Oh, the delicious irony.

So this is the problem facing all the bidders for Northern Rock. Not only do they have to compete against each other, they also need the backing of the Treasury and, most importantly, Northern Rock's shareholders, who have the power to reject any offer they don't like the look of. It is easily conceivable that in order for shareholders to back an offer, the Government has to take a bath on its loan and accept that it will not see the return of all the billions it has already handed over to Northern Rock. And that is hardly likely to impress the taxpayer, either.

One offer that may give all parties an escape route is that put forward by Olivant, the investment firm set up by former Abbey National chief executive Luqman Arnold, who wants to buy a minority stake in Northern Rock and borrow heavily on the markets to repay the Government. If he wins shareholder backing for the proposal, it is conceivable that he could improve the bank's fortunes and give shareholders a chance to benefit from an improvement in Northern Rock's fortunes.

He believes the bank's brand still has some life in it and insists that a new management team can restore confidence in the institution. Of course the hedge funds that have recently invaded Northern Rock's share registry in search of a quick buck may prefer the short-term gain offered by a full takeover of the company. However, that will not be much comfort to the small shareholder and the long-only institutional investor who might be prepared to wait longer to benefit from any future upside rather than partake of this particular fire sale.

The Government must clarify its position as soon as possible, and political expediency must not be allowed to hold sway over the interests of Northern Rock's owners – its investors.

Shareholders who decide that the outright sale of Northern Rock may not be their preferred option have to stick together if they want a different outcome.

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