Cerberus plans to merge Rock with US mortgage unit ResCap

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The Independent Online

Cerberus, one of the private equity firms bidding for Northern Rock, is planning to merge the UK lender with its ailing US residential mortgage business ResCap, it has emerged.

The Newcastle-based Northern Rock said yesterday it is still attracting new bidders but they continue to pitch offers substantially below the current share price. The stock slumped further.

Cerberus has alighted on Northern Rock as it seeks a rescue plan for ResCap – part of the GMAC Financial business that it jointly owns with General Motors – which could be forced into bankruptcy before the end of the year.

ResCap, through a subsidiary called GMAC-RFS, is already one of the top 20 mortgage lenders in the UK, selling loans through independent financial advisers rather than through a network of branches like Northern Rock. Based in Bracknell, Berkshire, it employs nearly 1,000 people and wrote £12bn of mortgages last year.

But the business has been dragged down by losses in the US, where it has suffered big writedowns on sub-prime loans and derivative products, and been forced to dump assets and scale back the business. If ResCap's net worth falls from $6.2bn currently to $5.4bn by the end of the year, it will breach promises to its creditors and could be pushed into bankruptcy.

GMAC hopes that the addition of Northern Rock's portfolio would help prop up ResCap, if the combined business looks strong enough to be refinanced. Details of the financing plans that would accompany a merger remain under wraps. Northern Rock shares closed down another 12.2p at 84.8p yesterday. In an update, the company said it had "received additional indicative expressions of interest covering a range of options for the business, one of which does contemplate an offer for the company materially below the market price at the close of business on Tuesday."

GMAC did not name Northern Rock publicly, saying only that it was pursuing a deal with "a large non-US mortgage lending business". It said: "If it were successful in making such an acquisition, GMAC's current intention would be to integrate ResCap's local mortgage business with the acquired institution". It also said it was pursuing several other options for ResCap, including a cash injection from GMAC. The disclosures came as ResCap laun-ched a plan to buy back $750m of its outstanding debt at current depressed market prices.