Virgin on a Rock victory

Richard Branson's clearly had a busy weekend. The bearded maestro's Virgin Group has nosed ahead in the race to buy Northern Rock, after being named as the preferred bidder by the ailing lender's board.

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Last Updated: 31 Aug 2010

The Rock said in a statement this morning that ‘it wishes to take forward discussions on an accelerated basis’ with the Virgin consortium, which also includes turnaround specialist Wilbur Ross, insurer AIG, asset manager Toscafund and First Eastern Investment Group.

The deal will involve the consortium injecting the Virgin Money business (valued at £250m) plus £1.3bn cash. Half of this will be raised via a rights issue, which will involve selling a load of new shares at 25p each – not great news for existing shareholders, whose shares were trading at more than three times that on Friday. On the other hand, at least they’ll be able to buy in on the same terms as Virgin, so they get to share in any subsequent upside (existing shareholders would retain a 45% stake, with Virgin and co. owning the other 55%).

The other good news is that Virgin is apparently not planning ‘any material reduction’ in headcount – so wide-ranging job cuts may not be necessary. And the group will pay off £11bn of the Rock’s £26bn debt up front, with a view to paying off the rest over the next few years – so the Bank of England will be relatively happy (although it still has to square away the extended loan period with the EU).

Bryan Sanderson, the Rock’s chairman, said it was a deal that ‘firmly restores the Company’s prospects’. Although the same can’t be said for his job prospects – he’ll be replaced by ex-Lloyds TSB chairman Brian Pitman if the Virgin deal goes through. Virgin Money boss Jayne-Anne Gadhia is set to take over as chief executive, with ex-RBS chairman Sir George Mathewson acting as her adviser.

Meanwhile Branson himself put out a personal message extolling the virtues of the offer: ‘At Virgin we have always seen change as a force for good…. We have some exciting plans… I have been personally very committed to finding the right solution to the company’s issues…’ he proclaimed today.

Of course it’s not a done deal yet. Virgin still needs approval from shareholders, and they might still be inclined to favour the offer from Luqman Arnold which puts a higher value on their existing stock (Arnold has already got the backing of stroppy shareholders SRM and RAB Capital). Equally, some of the bidders who have been left behind this weekend may come back with a better offer.

But for now, the Branson posse appears to be in pole position. And with the bank still haemorrhaging deposits like there’s no tomorrow, shareholders have a vested interest in getting a deal done as soon as possible – Virgin’s offer may not be ideal, but it could be the best of a bad bunch.

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