Sir Richard Branson has stepped in with a brazen rescue plan for Northern Rock, backed by a consortium of international financial heavyweights that includes former Royal Bank of Scotland chairman Sir George Mathewson and the renowned American turnaround artist Wilbur Ross.
Sir Richard's Virgin Group submitted its proposal to Northern Rock's bankers at Merrill Lynch yesterday, with a package that would inject " substantial new equity" into the stricken lender and rebrand it under the Virgin Money banner.
The consortium signed up to bankroll the proposal includes AIG, the American insurance giant; WL Ross, Mr Ross's buyout firm; Toscafund, a hedge fund chaired by Sir George; and the Hong Kong-based First Eastern Investment. The group said its bid offered "the quickest possible solution to restore public confidence in the business and return it to profitable growth." Northern Rock shares surged on the news, ending the day up 5.9 per cent to 273p, making it the FTSE 100's biggest riser.
The dramatic entrance will shake up the auction of the troubled Newcastle lender, which has proceeded ploddingly since it became the first UK bank in more than a century to experience a run on deposits last month. A slew of possible buyers, including American private equity firms JC Flowers and Cerberus, have bubbled up since the company first ran aground. It has since been propped up by more than £13bn from the Bank of England while it looks for a buyer. Though financial details of Virgin's plan remain scarce, it confirmed that Northern Rock would remain publicly quoted. The consortium would reverse its Virgin Money business into Northern Rock, rebrand it under the former, and pump in fresh money via new shares that would be issued at a discount to its quoted price.
However, the share issue could only be completed if Northern Rock shareholders agreed to first waive a key takeover code provision that would otherwise require a formal takeover offer of the group's existing shares.
James Hutson, an analyst at Keefe, Bruyette & Woods, said the bid was "woolly". He added: "The proposal focuses on addressing capital issues, whereas the core problem is liquidity/ funding. Also, the fact that new equity would be issued sub the current price should limit upside from here."
Virgin said Jayne-Anne Gadhia would step in as chief executive of the new entity. The former head of Virgin One's mortgage lending business, she left Virgin in 2001 when the unit was sold to partner Royal Bank of Scotland in 2001. She resigned from RBS in January and rejoined Virgin Money in March to head a renewed effort to get into the mortgage market, a hole in the business's offerings which currently includes insurance, credit cards and pensions. Sir George Mathewson, who engineered several takeovers in his time as chief executive of RBS, including the purchase of NatWest, is a special adviser to the bidding group. Sir Richard said: "I believe that if we're successful we'll be able to create an exciting new banking alternative for everyone in the UK. I and my team have pulled together a heavy hitting consortium that we believe has not only the knowledge and expertise but the financial clout to make a once great British institution great again."
Virgin's gambit will put other bidders, including JC Flowers and Cerberus, on the back foot. Northern Rock's bankers informed all prospective suitors that they had to submit "indications of interest" by the end of the day yesterday. It is understood that JC Flowers did so, though it was unclear if Cerberus hit the deadline.
The buyout giant Blackstone is also understood to be interested but has not pursued the deal with the same urgency as other bidders. Its executives have yet to meet or speak with Northern Rock's advisers.
Hedge funds have piled into the stock, pushing it up more than 60 per cent this week on the hope of pocketing a profit if the company is taken over.
Branson's backers in the battle for Northern Rock
One of the world's largest insurance companies, American International Group has operations in more than 130 countries. As financial backers go, they don't get much bigger. Last year's turnover came in at $113bn (£55.5bn). In the UK, it is perhaps most famous for agreeing last year to the largest ever football shirt sponsorship deal with Manchester United.
A London hedge fund with more than £3bn under management. Founded by former banking analyst Martin Hughes, the firm appointed Sir George Mathewson as chairman last year after he stepped down from the same role at Royal Bank of Scotland. He oversaw the acquisition of NatWest while at the latter.
* W L Ross
The eponymous buyout firm of Wilbur Ross, the man New York magazine dubbed a "connoisseur of failed companies". Mr Ross made himself a billionaire by buying companies in sectors that no-one else would touch – steel mills, textiles, coal mines. He banked a fortune when he sold International Steel to Lakshmi Mittal for $4.5bn (£2.16bn).
* First Eastern Investment
Founded by influential Hong Kong businessman Victor Chu, the firm usually focuses on regional investments. It controls $HK4bn (£250m). A holder of a law degree from University College London, Mr Chu has worked in the past in Hong Kong's central policy unit and as a director of the Hong Kong Stock Exchange.Reuse content