It was announced on 17 November 2011 that Richard Branson of Virgin Money had made a successful bid for Northern Rock.
The main points of the deal are as follows -
1. Virgin and its backers will pay £747m in cash for the shares of the bank, which have been held in public ownership since 2008. Sir Richard's friend, Wilbur Ross will contribute some £260m, while the Virgin group will contribute a mere £50m, together another £50m from Stanhope Capital, an Abu Dhabi wealth fund. This adds up to £360m.
Under pressure for a full disclosure, Richard Branson announced that some £250m would come from Northern Rock capital and a further £150m from Virgin Money.
The use of Northern Rock's own funds has created a storm of outrage. Prior to this revelation, one was led to believe that Richard Branson was using his own money to fund the purchase. Now, it is confirmed that he will be using the funds of Northern Rock itself.
He will do this by reducing the so-called Tier 1 capital ratio from the current level of 30% to a reduced level of around 15%. This means that the amount of money which Northern Rock needs to hold in cash reserves for a rainy day will be halved.
Whether Sir Richard, with the complicity of the UK Chancellor of the Exchequer, George Osborne, will succeed with this questionable practice remains to be seen. Critics have rightly accused him of asset stripping and the FSA will now become involved.
2. Northern Rock plc was divided in two after being nationalised. These two parts are referred to as the good bank, and the bad bank. The bad bank holds the toxic assets or bad debts of Northern Rock and remains in public ownership. The good bank is valued at £1.2bn, and this is what Richard Branson is purchasing.
3. Based on the difference between the valuation of the good bank and the price paid by Mr Branson, the difference is some £450m. Most commentators describe this as a loss to the taxpayer and represents around £15 for each UK taxpayer
4. As a sweetener to the UK government, Virgin will pay a further £80m if the newly enlarged Virgin Money is floated or sold within 5 years. This is an unlikely prospect. Also the UK government will retain an interest in the business through a holding of £150m of convertible debt. This will convert into a stake in Virgin Money should it be floated within 5 years.
5. What does Richard Branson get -
75 High Street Branches, mainly freehold premises
Around 1m customers
Some 2,000 employees
A mortgage book of £14bn, which does not include any toxic assets
£16bn of retail deposits
6. What Sir Richard does not get is the bad bank part of Northern Rock. The bad bank contains the toxic assets or bad debts of the company. These assets mainly comprise mortgage advances to Northern Rock customers and these mortgage advances typically were made at some 125% of a property valuation. Due to the political sensitivity of foreclosing on residential properties and making owners homeless, these customers have enjoyed either a complete repayment holiday or a reduced payments regime in order to avoid foreclosure.
The bad bank assets are administered by Northern Rock Asset Management, NRAM, and the UK taxpayer has injected some £39bn into NRAM since nationalisation. The nominal asset value of the bad bank are stated at some £80bn in their accounts. In the fullness of time, how much of this figure will be realised and returned to the UK Treasury and taxpayer is simply a matter for speculation.
7. It is difficult to estimate how much the UK government has pumped into Northern Rock since nationalisation. £39bn has been injected into NRAM and at least a further £29bn into Northern Rock. The UK government will continue to be responsible for funding the bad bank as there is no prospect of selling it in the current market conditions. It should be noted that the bad bank may well ask for more taxpayer funds.
8. From Virgin's viewpoint, the deal is the successful culmination of their desire to acquire Northern Rock in 2008. At that time Sir Richard was offering £1.25bn as an initial payment, and would have acquired the bad banks toxic assets. With the benefit of hindsight, Mr Branson should now thank Alistair Darling and Gordon Brown for turning down his 2008 offer. The current deal gives him the good assets: the toxic assets and liabilities remain the responsibility of the UK taxpayer.
9. There is considerable synergy, or the 2+2=5 effect, of the deal. Virgin Money does not have High Street branches and focuses on insurance and credit cards. Northern Rock has branches and concentrates on retail savings and mortgages.
10. The deal is definitely a veritable steal for Richard Branson and the Virgin Group. The Chancellor, George Osborne, can claim that he is beginning to normalise banking activity in the UK by returning the good part of Northern Rock to the private sector. As usual, it is the taxpayer who feels that his interests have not been well served.
What is clear is that George Osborne was desperate to generate some action and good news concerning his management of the UK banking sector. The much heralded banking reforms, promoted by the Liberal Democrats have been discarded as unworkable. Based on the media reaction, whether this gives Mr Osborne favourable publicity remains to be seen.
11. Ever since Northern Rock was nationalised in 2008, there has been an ongoing legal challenge for compensation from the shareholders whose shares were compulsorily acquired by the UK government at nil cost. Many of these shareholders were private investors from the North East of England and their claim on the assets of Northern Rock has been systematically repudiated by successive governments.
UPDATE OF 21 November 2011
George Osborne, the UK Chancellor, has been criticized for selling Northern Rock too soon as it is argued that he could have got a better price for the taxpayer if he had waited. He has revealed that the UK was bound to the terms of an agreement made by Alistair Darling with the EU that the bank would be returned to the private sector by 2013.
It was seriously remiss of the previous government to conceal from the UK taxpayer this undertaking to the EU at the time of the nationalisation of Northern Rock. George Osborne should have disclosed this obligation from the outset and not waited until the truth was forced out of him. Many will conclude that Alistair Darling had neither the competency nor integrity to be Chancellor, and George Osborne's reputation is also sullied.
Copyright - Leslie Hardy, 22 November 2011
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