Northern Rock's biggest shareholder queries Branson bid

Northern Rock’s biggest shareholder is today hoping for an improved offer for the lender after querying the value of the salvage bid led by Richard Branson’s Virgin Group.

Hedge fund RAB Capital – owner of a 6.7% stake – said the proposals by the consortium named as preferred bidder to rescue the company undervalued the bank.

The consortium is planning to inject £1.3bn (€1.8bn) of funds in return for a controlling stake of at least 55%.

Part of the cash will be raised through new shares being offered at 25p each, giving Northern Rock an implied value of about £225m (€313m) – a fraction of the group’s £5.2bn (€7.2bn) value seen in February.

RAB Capital chief executive Philip Richards said events were a “step closer” to securing the business – but is pressing for a higher offer.

He said: “We do not believe that this proposal reflects the true value of Northern Rock, and we would expect either that this proposal be improved or that alternative proposals be brought forward which would combine a similar repayment schedule for the Treasury together with improved terms for shareholders.”

RAB Capital’s opposition could pose a threat to the deal being given the go ahead. The group has already said it would block any deal that would not deliver value for money for shareholders.

About 100,000 of Northern Rock’s small shareholders also wrote to company chairman Bryan Sanderson on Sunday to express fears that directors were planning a “fire sale” of assets.

The deal for the troubled lender – at the centre of the UK’s first bank run for nearly 150 years in September after soaring borrowing costs – will see Virgin Money and Richard stump up £200m (€278m).

The Northern Rock name would go, with the bank rebranded under the Virgin banner.

Virgin has pledged to pay back £11bn (€15bn) of Northern Rock’s estimated £25bn (€34bn) loans from the Bank of England immediately and said it had a “clear path” for repaying the remainder.

It also hopes to retain most of the 6,000 staff.

Mr Sanderson welcomed the bid as being “very good news for Northern Rock”.

Sandy Chen, analyst at Panmure Gordon, said the deal could see investors lose out, with the bank not returning to profit for nearly two years despite the cash injection.

He said: “Even though a substantial portion of the Bank of England funding may be repaid, the continuing high costs of debt funding will severely impact margins.”

But analysts at Shore Capital Stockbrokers said while there was uncertainty around shareholder approval, “we would expect the proposal to proceed in the absence of a viable alternate offer”.

The so-called “tripartite authorities” – the Bank of England, the Treasury and the Financial Services Authority – are so far supportive of the offer, though they will also have to give their final approval for the deal to go through.

Northern Rock’s funding model came under fire when the summer’s credit crunch left it unable to raise cash in wholesale money markets.

The bank’s savers quit the group in droves after news broke of its move to call on the Bank of England as lender of last resort.

Virgin is joined in the bidding consortium by New York investors WL Ross & Co, hedge fund Toscafund Asset Management and Hong Kong-based finance house First Eastern Investment Group.

The group is expected to finalise its offer “as soon as possible”, Northern Rock said.

But the bank confirmed it was continuing to explore other options as part of its strategic review.

Other interested parties included former Abbey chief Luqman Arnold’s Olivant group, which plans to buy a minority shareholding and turn the business around with a heavyweight management team.

US buyout firm JC Flowers has also approached the group, with plans to run the business as a going concern and repay the Bank of England loans by the end of 2010.

And the Government could yet decide to step in and nationalise the bank if the buyers do not agree to repay the Newcastle-based group’s debt burdens under terms favourable to the taxpayer.

Richard’s bid is understood to depend on continued support from the taxpayer for two to three years.

If Northern Rock is not sold, it may end up being put into administration under insolvency procedures, which could leave shareholders with nothing.

:: Virgin took out an advertisement in various newspapers today in which Richard Branson told Northern Rock customers he had been personally very committed to finding the right solution to the company’s issues.

At the heart of the Virgin proposal was a commitment to protect the savings of existing Northern Rock customers, and put the business on a solid financial footing, with a multi-billion pound new equity and funding arrangement, he wrote.