An audacious bid by one of Britain's most swashbuckling entrepreneurs, Sir Richard Branson, to take over the crisis-hit Northern Rock bank was greeted with a smile from ministers and a sneer from the City yesterday, which dismissed it as an attempt to buy a large financial institution on the cheap.
A consortium led by Sir Richard's Virgin empire has been named as the preferred bidder by Northern Rock's board in a deal that would pump £1.3bn into the bank and save the jobs of most of its 6,000 staff, as well as guaranteeing to pay back £25bn of emergency loans from the taxpayer.
Under the deal, the business would be merged with Sir Richard's Virgin Money mortgage business and immediately repay £11bn to the Bank of England with a promise to return the remaining £14bn over the next three years, providing the business prospered.
Existing shareholders would put up half of Virgin's £1.3bn through a new sale of shares, giving them a stake in the rescued company's future profitability.
But the new shares would be sold at 26p each, valuing Northern Rock at less than £200m – almost half of the £362m value placed on the company at the start of trading yesterday and 4 per cent of its £5bn value at the beginning of the year. Shares in Northern Rock soared 28 per cent to 110p yesterday, indicating that the City believes the business will be sold for much more.
The Government praised Sir Richard's private equity deal, which would bring a quick end to a crisis which has undermined confidence in its stewardship in the economy. Voices in the City, however, warned that Sir Richard was attempting to take control of a company with £100bn of assets for a small outlay. One of Northern Rock's largest shareholders, RAB Capital, which has 6 per cent of the shares, said that it intended to oppose the offer, which it described as "cheeky" and "too low".
Jon Moulton, managing partner of the private equity firm Alchemy Partners, described the proposal as "perfectly extraordinary".
"It sounds like Sir Richard is going to be risking about £200m to support a bank which had £2.5bn of equity when it failed and it sounds like we are going to support that investment with about £30bn of public capital," he said.
John Hutton, Secretary of State for Business, said the Government was trying to protect taxpayers and depositors and stabilise the banking system. "I don't think any of the other bidders were offering a better deal in terms of the repayment of Bank of England lending," he said.
Under the deal, Sir Richard would put around £200m of his estimated £3.1bn personal fortune into the enlarged Northern Rock business, along with his Virgin Money business.
What the deal means for ...
Almost half of the emergency loans from the Bank of England would be repaid immediately with a promise of the rest. Not an ideal outcome, but it avoids an immediate, large loss bailing out Britain's fifth-largest bank.
A heavy reduction in the value of their investment, particularly for those who bought when the shares hit the high of £12.42 in February. Buying more shares for 25p offers some "upside" to cushion the blow.
The Government has promised to guarantee all savers' money in the short term. But once stability is returned to Northern Rock, and it is rated by the debt agencies as a normal business once more, that guarantee is likely to be dropped. Then the guarantee will be the standard £35,000.
* RICHARD BRANSON
The deal risks £200m of his money, but the future profitability is vast. For such a small outlay, Sir Richard can pose as a white knight while riding off into the sunset on a steed laden with gold. His Virgin Money can expand cheaply – and with vast publicity – on to the high street.
* THE GOVERNMENT
After months of anguish ministers can breathe easily once more. A threat to the banking system would be removed, the taxpayers' £25bn underwritten and valuable jobs in Labour's northern heartland saved. Politically: not too bad.Reuse content