Rock's small shareholders step up fight against Virgin

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Northern Rock's small shareholders are lining up with some of the UK's sharp-est hedge fund operators to oppose Virgin's proposed takeover of the bank.

Meetings held in Newcastle and London by the Northern Rock Shareholder Action Group (NRSAG) voted against Sir Richard Branson's proposal and NRSAG will now draw up a campaign to inform investors about what it believes are the shortcomings of the Virgin deal.

Northern Rock has about 180,000 small investors who hold 20 to 25 per cent of the bank's stock. Roger Lawson, chairman of NRSAG, said: "We are going to say we don't think the Virgin offer is good enough in terms of value."

Mr Lawson said most small shareholders could not afford to take part in Virgin's proposed rights issue to get a share of any recovery. The structure of the Virgin deal is also too complex for many individual investors to understand, he added.

Small investors opposing Virgin would be battling alongside the hedge funds SRM and RAB Capital, which are urging the bank's board to install new management who can ride out the credit squeeze and realise the value of its assets.

SRM increased its stake in Northern Rock yesterday to 9.1 per cent after raising it to 8.5 per cent on Tuesday from 6.84 per cent. Some institutional investors in Northern Rock are also said to oppose the deal and could join a campaign to stop the bank being sold.

Many of the small shareholders are in Northern Rock's North-east heartland and identify closely with the bank, which is the region's biggest private-sector employer. Mr Lawson said shareholders in the North-east were against Sir Richard's plan to scrap the Northern Rock brand and replace it with the Virgin name, which has little resonance in the region compared with Northern Rock.

Olivant, the private equity firm run by Luqman Arnold, the former boss of Abbey National, wants to buy in to Northern Rock and keep the bank's brand. Mr Arnold met Northern Rock's chairman Bryan Sanderson and its advisers yesterday in what was said have been a "constructive and helpful" meeting.

Virgin's proposal promises to repay 11bn of the Bank of England's 20bn or more of loans to Northern Rock upfront and the remainder by the end of 2010. It would inject 650m of cash plus the existing Virgin Money business into Northern Rock and raise another 650m from shareholders in a rights issue.

Northern Rock has said it will continue to talk to other prospective buyers after giving Virgin "preferred bidder" status on Monday. JC Flowers and Cerberus, the US hedge funds, are still thought to be interested but would also face shareholder opposition because their proposals would probably give less to investors than Virgin's.

Northern Rock shares rose for the fourth day running yesterday, closing up 1.7 per cent at 120.7p.