Shares of RAB Capital, Northern Rock's second-biggest shareholder, fell to a two-year low yesterday after the Government announced that the stricken bank would be nationalised.
The hedge fund's stock dropped 6.9 per cent after falling nearly 10 per cent in earlier trading. The shares have lost 27 per cent of their value this year.
RAB and SRM Global, another hedge fund, placed bets on Northern Rock in September after the bank's shares slumped in the wake of its emergency funding from the Bank of England.
They took on the Government and Northern Rock's board by increasing their stakes to almost 20 per cent between them. The funds opposed the preferred bid for the bank by Sir Richard Branson's Virgin consortium, which they said would dilute shareholders' interests unfairly. The Government rejected Virgin on Sunday and opted for nationalisation instead.
Northern Rock's shares were suspended yesterday at 90p in readiness for nationalisation. They had lost about 90 per cent of their value in the previous six months. The Treasury will appoint an independent valuer soon to decide what Northern Rock's shares are worth. It will use the valuation to decide how much to pay in compensation to shareholders. Analysts said the valuation could be little or nothing because it will not take into account the Government's guarantees to the bank.
Investors have threatened legal action against the Government if it nationalises the bank without paying full compensation to shareholders. SRM and RAB argue that the bank's net asset value is £4 a share. The Government is hoping that the independent valuation will reduce the chances of a protracted battle with shareholders over compensation.
Monaco-based SRM, headed by Jon Wood, intends to sue the Government in the European Court of Human Rights for "misfeasance". SRM argues that the Government had said repeatedly that Northern Rock was solvent yet the Treasury now wants to value the bank as if it was not solvent. A spokesman for RAB declined to comment but said the Northern Rock stake accounted for less than 2 per cent of the company's total funds under management. RAB probably paid more than £50m for its stake.
RAB and SRM were pitted against short sellers of Northern Rock, who have emerged triumphant. The Northern Rock shares are held in RAB's Special Situations fund, run by Philip Richards, the company's chief executive.
Mr Richards said on Sunday that he was disappointed by the Government's decision to nationalise Northern Rock and that he would have to "seriously" consider his options.Reuse content