Treasury prepares to consider rival bids for Rock
Monday 04 February 2008
The Northern Rock crisis will inch a little further towards resolution today, as three bidders for the stricken mortgage bank submit their rescue proposals to the Government.
The Treasury, in consultation with the Bank of England and the Financial Services Authority, is expected to spend a week to 10 days considering the proposals, before ruling on which bidder will take over the bank, whose debt to the taxpayer is to be repaid through the issue of Government-backed bonds. Of the three players left, Olivant, the investment fund run by Luqman Arn-old, is the clear favourite among shareholders, particularly RAB Capital and SRM Global, the two hedge funds that have bought large stakes in the bank.
However, an in-house team led by Paul Thompson, appointed as a Northern Rock non-executive director, has also impressed investors in recent days, and is understood to be submitting proposals on similar terms to Olivant.
Virgin Money, the retail finance arm of Sir Richard Branson's Virgin Group, has struggled to win support from shareholders, chiefly because it proposes taking a much larger stake in Northern Rock than the other bidders, leaving less for existing investors. But Virgin insiders say that shareholders' views are of secondary importance in the bidding process, because the Treasury has said it will make its decision based on the interests of the taxpayer, rather than shareholders.
All three bidders have been told that their proposals must include a mechanism through which the taxpayer can benefit from any recovery in the value of Northern Rock – almost certainly through warrants that the Treasury could cash in at some point in the future.
The Chancellor will also consider the capital the bidders intend to put into the business – a measure on which Virgin scores highly – and the merits of their res-pective business plans. Virgin is stressing its determination to dump the Northern Rock brand; its rivals would continue trading under this marque.
Once the Treasury has made its decision, it will submit its recommendation to the Rock board for ratification. While the board has clear responsibilities towards shareholders, ministers have made it clear they will not allow RAB or SRM to impose their favoured solution. But RAB and SRM are insistent that bids should reflect the bank's true value. Both shareholders held talks with the bank last week and emerged arguing that the underlying business had not deteriorated despite the Rock's continuing liquidity problems.
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