Why shareholders dread nationalisation

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Railtrack. Rolls-Royce. British Leyland. It's no wonder that in the City nationalisation is a four-letter word. When the Government takes ownership of a private business, it almost invariably means that the shareholders end up with nothing, or very close to it. So investors in Northern Rock were surely not feeling very reassured by Chancellor Alistair Darling's announcement yesterday that any compensation due to holders of shares in the stricken bank will be "determined by an independent valuer".

It has been years since the last nationalisation in the UK. As Mr Darling detailed plans for emergency legislation that will pave the way for the Government to take over, investors will have been thinking back to 2002, when Railtrack was forced into administration and then sold to Network Rail, a not-for profit organisation backed by the Treasury.

While not technically a nationalisation, it was in all but name. At the time Railtrack shares were suspended, they were trading at 280p. Shareholders ending up getting back 262p from the company, but it took years of acrimonious legal tussling to get the Government to cough up.

The Railtrack Private Shareholders Action Group claimed that they were owed another £157m from the debacle and that the then-Transport Secretary, Stephen Byers, had abused his power by refusing to pour more money into the company, thus forcing it into administration. They finally lost their case in 2005, though they succeeded in creating a massive headache for the Government.

There are parallels to be drawn between Railtrack and Northern Rock. In both cases Government intervention was a last-ditch emergency measure.

But where Railtrack had vast physical assets that carried an intrinsic value and were vital parts of the country's infrastructure, the same can't be said for Northern Rock. The bank's tainted image will make drumming up new business an uphill battle.

Next to other nationalisations, Railtrack investors were lucky. Investors in British Leyland and Rolls-Royce were left with virtually nothing when the Government stepped in. Faced with the "temporary" nationalisation of Northern Rock, investors will gain little comfort by such precedents.