Northern Rock shares surge on last day of bidding

Shares in Northern Rock surged today as bidders finalised their proposals for the crisis-hit mortgage lender.

Shares in Northern Rock surged today as bidders finalised their proposals for the crisis-hit mortgage lender.

The Government’s deadline for rescue deals for the bank expires at the close of business today, with three possible proposals likely to be on the table.

Northern Rock’s stock was as much as 10% higher as the teams from Richard Branson’s Virgin-led consortium, investment firm Olivant and the bank’s own management worked on their submissions.

A spokesman for Virgin said it was still working on its proposals this morning, although there were reports today that the some of the Newcastle-based bank’s shareholders were yet to be convinced about the terms.

A spokesman for Northern Rock’s in-house management said they would be submitting plans, while the Olivant team remained tight-lipped. A spokesman said it would tell the stock market if and when any proposal was lodged.

Any potential deal must be approved by the “Tripartite Authorities” comprising the Treasury, Financial Services Authority and the Bank of England, which are likely to decide on a preferred bidder by the end of February.

Northern Rock owes around £24bn (€32bn) since it was forced to seek a Bank of England bail-out last September as its borrowing costs soared in the credit crunch – sparking the first run on a UK bank in more than 140 years.

The company was on the brink of nationalisation until two weeks ago because potential private sector rescuers were struggling to raise funding in tighter debt markets.

The Government will also need to satisfy the European Commission that the eventual solution decided on for Northern Rock’s woes does not flout rules on state aid to companies.

Virgin plans to merge the Northern Rock with its existing Virgin Money business and inject £1.3bn (€1.7bn) of new equity into the ailing firm. Half of the cash will come from the consortium, with the remainder being raised through an offer to existing Rock shareholders to buy new shares for 25p each through a discounted rights issue.

Meanwhile Northern Rock’s in-house management proposal would see the former chief executive of insurer Resolution, Paul Thompson – who joined the lender’s board a month ago – take over as chief executive if successful.

Northern Rock had a stock market value of around £5.3bn (€7bn) a year ago but it is now worth less than a tenth of that figure.

Its business model involved borrowing most of its cash for mortgage lending in money markets, but the firm was caught out last August when banks fearful of losses on US mortgage investments stopped lending to each other.

Liberal Democrat Shadow Chancellor Vince Cable called on the Government to ensure taxpayers get value for money from the successful bidder.

He said: “Mr Darling should not allow his desire for a speedy private sale to override the high risk to the taxpayer.

“Taxpayers now face years of supporting Northern Rock, while any new private owner makes an absolute killing, assuming that the EU decides that the Government’s position of guarantor is even legal.”

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