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Branson's Northern Rock deal rolls into trouble
Last updated at 00:22am on 27.11.07Sir Richard Branson's plans to take control of Northern Rock were hit by setbacks only hours after he was formally named front-runner in the battle for the bank.
Opposition politicians warned the Virgin boss's proposals could saddle taxpayers with billions of pounds of Northern Rock liabilities for years.
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Looking North: Sir Richard Branson with Virgin Money chief executive Jayne-Anne Gadhia
And powerful Northern Rock shareholders declared they would oppose the deal after it emerged Sir Richard wanted them to stump up £650million of their own cash as part of a takeover.
Newcastle-based Northern Rock said yesterday morning it was in "accelerated" discussions with Virgin Money and its financial backers.
The announcement came after a weekend of talks and it raised hopes that a solution to the country's worst banking crisis for decades could finally be close.
Sir Richard said a deal would save thousands of jobs at the firm and prevent it from being broken up.
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Northern Rock: Shareholders would need to find £650m as part of Sir Richard's deal
The terms of the deal showed that Sir Richard was willing to repay £11billion of Northern Rock's Bank of England loan immediately.
But rival bidder JC Flowers had proposed an up-front £15billion repayment to taxpayers.
Branson's Virgin Money, headed by Jayne-Anne Gadhia, must come up with some £14billion to repay the Bank of England over three years. It vowed to repay the interest Northern Rock owes.
Worryingly, a statement by Northern Rock suggested that the Bank of England would rank equally with private sector creditors in the queue for repayment. As a result, it could be harder for taxpayers to get their money back.
Vince Cable, acting Liberal Democrat leader, said: "There are all kinds of obstacles to this deal. The key point is what they are offering taxpayers?"
Conservative MP Michael Fallon said: "Any deal must ensure we get back all our money plus interest."
He added that Chancellor Alistair Darling "must come clean on what the actual cost will be in lost interest".
"We will hold him to account for every penny."
Virgin has proposed to inject £650million into Northern Rock, including £200million of its own money. Another £650million would be raised by issuing 2.6billion new shares at 25p each.
That means the firm's 180,000 private investors would have to stump up more than £700 each on average if they decided to subscribe. If they don't, their holdings in the company would be dramatically diluted.
There are concerns that the transaction represents a huge financial challenge for Virgin Money, a firm far smaller than Northern Rock.
But a City analyst said: "Virgin probably have as good a shot as any. And it's not as if the other candidates have brands that anyone would recognise."
Virgin Money boss Jayne-Anne Gadhia said: "This is not a get rich quick scheme. We are in it for the long term."
In a letter to the Commons Treasury Select Committee, Mr Darling told MPs the door is not closed to alternative proposals. Other bidders vowed to press ahead with their proposals.
Well, she won't last long up here
Reader views (6)
So much for the British banking system. It used to be quite reliable but now you should spread your risk among different banks. It does seem that the government is not really in control.
- Pete, London
It is worrying that there is the possibility that Northern Rock wont be recovered, that it might sink, in which case this meddling government who scuppered an earlier salvage opportunity from Lloyds TSB et al will have inadvertantly run up the British taxpayer a debt which was completely avoidable. The lampooning of the FSA was a complete smoke screen for a catastrophic error which could make the ERM fiasco in the 80's look like beer money. Labour needs get its priorities in order, to stop meddling with what works and fix what doesnt.
- Karl, London
The shares are probably worthless. It's about time for the government to call the shareholders' bluff. Tell them to repay the loan, and when they can't, nationalise Northern Rock. Then allow Richard Branson and any other interested parties to submit bids to take it off the taxpayer's hands. The final resort, of course, would be to liquidate the bank, but it's probably worth more as a going concern.
- Nigel, London
What a mess this has been. How can a bank have failed in the UK in the 21st century?!
- Jacqueline, Hampstead, London
It's great news for the man on the street that Branson is going for this.
As an MBA student covering a lot of what Branson has been involved in, I am an admirer of his business acumen and he also would appear to have very much of a people's champion spirit about him.
He absolutely revolutionised the pension industry industry when the established cartel players did very little to make pensions more accessible to the very people that needed them and it was not until Virgin moved in that suddenly these players found ways to increase benefits and reduce admin costs.
All the best Branson and I hope you succeed.
- Kajen, London, UK
This has been such a joke.
- Georgie, Islington, London
