Northern Rock's biggest shareholder demands value for money

The biggest declared shareholder in Northern Rock today threatened to block any deal to restore stability to the troubled bank that would not deliver value for money for shareholders.

Philip Richards, chief executive of hedge fund company RAB Capital, said it would be “totally inexcusable” to deliberately force the company into administration by rejecting potential offers from Richard Branson’s Virgin and Luqman Arnold’s Olivant.

Mr Richards, who bought into Northern Rock only after it fell into crisis this summer, said that either of the bids could result in the Government eventually getting back its £25bn (€34.6bn) loan and allow the rebuilding of the bank.

But Liberal Democrat acting leader Vince Cable accused Mr Richards of seeking to “blackmail” the Government and insisted that the best option for Northern Rock was temporary nationalisation.

Although he did not rule out an acceptable deal with Virgin or Olivant, Mr Cable said it looked likely that either would require the postponement or cancellation of interest or the delayed repayment of part of the loan - effectively subsidising shareholders at the cost of the taxpayer.

Mr Richards told BBC Radio 4’s Today programme: “We would vote against any offer which seeks to wipe shareholders out or nearly wipe shareholders out, particularly when we know that there are two good offers out there that could lead to complete rebuilding of value for all shareholders.”

Asked whether his company would sue the Government if it regarded any eventual deal as unacceptable, he replied: “If it was outrageous enough, we would have to consider our actions, but it is not our purpose. We don’t want to be confrontational about this.”

He added: “This is a good bank, which is clearly still solvent, according to the Government’s own guidelines, and there are two bids out there now which seek to work with shareholders to rebuild value for everybody and which, from the Government’s point of view, will give them back their money every bit as fast as a break-up.

“It would be totally inexcusable for this Government to deliberately force this bank into administration.”

Mr Richards said the deals being worked on by Virgin and Olivant appeared “pretty reasonable” and were preferable to the prospect of seeing Northern Rock being bought by “vulture funds” which would break the bank up and sell its parts off.

“Of course, they want to get a good share of the company,” he said. “They are talking about 55% for about £1bn (€1.3bn). That would imply a look-through price of around £2 (€2.70) as a starting value from which we could rebuild.

“The Olivant bid and the bid from Virgin are good for shareholders and I think they are also good for the Government. Both actually offer the same as the break-up funds, the vulture funds, that want to take everything away from shareholders.

“They both offer about £15bn (€20.7bn) back to the Government right now. They both offer new cash into the company. They both offer repayment within the next couple of years. I would think the Government with these proposals might get their money back sooner than 2010.”

Mr Cable told Today: “This gentleman is blackmailing the Government and the taxpayer.

“He is saying ’You have to put in more and more money or I will just block any sale that the Government plans’. It’s an outrageous position for the Government to have got itself into.”

Without the Government’s line of credit, Northern Rock would effectively be worthless to shareholders, said Mr Cable. The Virgin or Olivant deals would probably allow shareholders to hold on to some of the company’s value at a cost to taxpayers.

“The deal that might emerge with these two purchasers could well involve the postponement or cancellation of a large amount of interest on these loans or significant postponement of replacement – in effect a subsidy.

“Either the Government goes along with that or it pulls the plug, in which case the company is forced effectively into bankruptcy and some form of administration in the meantime, in which case the Government could lose a lot of money, the people in the North East are wiped out, but the depositors are protected.

“The Government has to have a plan to take this company into temporary public ownership to stabilise the position. The question is whether you regard being blackmailed as a more attractive option.”

Mr Cable said that the interests of shareholders – particularly those which bought into Northern Rock after its difficulties became clear – should come low in the Government’s priorities.

“The Government has got to be clear about what its priorities are,” he said. “Its priority is to protect taxpayers’ money – and we are talking about staggering sums of money now. Twice the primary schools budget has already gone into this company.

“It also has to protect the depositors. It also has a moral obligation to the company in the North East.

“The shareholders – and particularly people like Mr Richards who is not a long-standing shareholder, he is a hedge fund investor who bought into the company after it got into difficulty – the idea that we have some sort of moral obligation to him is outrageous.”