Confirmation of potential takeover talks sent shares in Northern Rock plummeting Monday morning by over 20%. A rescue deal may be weeks away as the bank said discussions were only 'preliminary in nature'.
Northern Rock will encounter further pressure tomorrow. Chief executive Adam Applegarth and chairman Matt Ridley face a grilling from MPs on the Treasury Select Committee over their handling of the recent crisis that saw the first run on a UK bank for 150 years. Customers rushed to withdraw their funds to safeguard their savings.
Sir Richard Branson's Virgin Group is the favourite to win ownership. Plans were unveiled last Friday (12 October) to integrate Northern Rock into its Virgin Money business. Private equity firms JC Flowers and Cerberus are also said to be interested in the bank.
Despite criticism at the weekend that its brand was 'too dated' to save Northern Rock, Virgin has the support of several heavyweight players including US insurance group AIG; American buyout specialist Wilbur Ross; British hedge fund ToscaFund; and Hong Kong investment group First Eastern.
Virgin is expected to pay up to £1 billion to gain a heavily-discounted equity stake.
Stockbroker Panmure Gordon said the consortium could gain 70% stake in Northern Rock by investing this amount in new shares, alongside a £500 million cash injection. This could result in 20% dilution for existing Northern Rock shareholders and 150% return for the Virgin investors.
Whoever wins control of the bank may only have six months to stabilise the business before the government withdraws £28 billion of guarantees to savers and cuts the Bank of England's £13 billion in emergency loans.
If the current safeguard underwriting customer deposits is counted as 'rescue aid' under European Commission rules, this protection is only applicable for six months, claimed the Mail on Sunday.
Northern Rock investors are unlikely to accept the first offer that comes along. Market commentators believe that shareholders will oppose rescue plans in the hope of getting more cash.
