ALL three bidders for Northern Rock have been told that they will have to accept a “performance warrant” to allow the government to share in any financial recovery of the stricken mortgage bank.
The warrant, which can be converted into shares at a future date, will safeguard the government from a successful bidder making huge future profits at the public expense. The warrants are part of a series of restrictions that have been imposed on potential buyers of Northern Rock. Most of the curbs relate to ensuring any rescue deal does not fall foul of EU rules on state aid.
In government guidance notes issued to bidders, they have been told the amount of retail deposits that could be accepted within the first three years may be capped.
The successful bidder will also be barred from going into the wholesale markets to raise more capital while the stricken bank is benefiting from a £28 billion government guaranteed bond. This is to stop complaints from rival banks accusing Northern Rock of exploiting an unfair commercial advantage. Those who have seen the notes say the implication is that Northern Rock’s cost base will have to be scaled down quickly, which will lead to job losses among its 6,500 workforce.
Three bidders will tomorrow submit to the Treasury their rescue plans to save the bank. They include one from Olivant, headed by Luqman Arnold; another is a consortium headed by Sir Richard Branson’s Virgin Group and the third is a stand-alone solution that would see Paul Thompson, a former investment banker, put in as chief executive. Nationalisation also remains an option that has not been ruled out by Alistair Darling, the chancellor.
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Thompson spent last week seeking support from investors to back a rights issue. Shareholders have indicated they will help him raise £400m, but this excludes any support from the bank’s two biggest investors, RAB Capital and SRM. They told Thompson on Friday night they would not support him.
Instead they have reaffirmed their support for Olivant. Jon Wood of SRM told The Sunday Times: “We believe this deal represents the best chance for the company to thrive and the fastest way for the government to get its money back”.
If Thompson’s hopes of running Northern Rock are to have any chance of success he will need to raise up to £700m. Olivant’s offer, which is supported by RAB and SRM, has not changed since the outset. But its biggest obstacle is its proposal to inject less equity than Virgin.
Virgin had intended to put in as much as £1.5 billion, but because the Bank of England has stipulated it wants Northern Rock’s activities to be initially scaled back, the equity now required could drop to around £1.2billion.
However Branson’s company is unlikely to bow to pressure to cut the valuation of £250m it is attributing to Virgin Money (the entity that would run the bank).
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Under Branson’s plan, his consor-tioum would inject £500m and investors could take part in a £250m rights issue. Branson would receive a royalty from use of his company name. This would start at under £10m and work on an annual sliding scale, depending on how successful the rescue was and how much new business was written.
Virgin’s biggest hurdle is to win the support of investors who would suffer huge dilution in the value of their holdings. Northern Rock’s share price closed the week at 96p, valuing the group at £530m. Virgin had intended to hold a rights issue at 25p in the pound but this figure could be raised.
The Treasury has made it clear to bidders that its priority is to save Northern Rock and it is prepared to ride roughshod over investors to achieve a successful outcome.