City slashes price for Rock takeover

The City believes that Northern Rock no longer has any future as an independent bank and will be absorbed by one of its rivals sooner rather than later.

The former building society's share price rallied 243/4p to 3071/2p today after Chancellor Alistair Darling unveiled the new rescue package last night.

Analysts said the Government had in effect put a lifeboat in place while it finds a commercial resolution for the crisis which is almost certain to mean a recommended takeover.

Goldman Sachs said that it believed the maximum price any buyer would be prepared to pay was 296p - £1.3 billion - unless it was prepared to pay a large premium for goodwill. The broker said: "While there could be relief from a financial buyer, we believe that any potential acquirer is likely to await signs of stability first."

David Buik of BGC Partners, the broking arm of Cantor Fitzgerald, said: "This has greatly improved the chances of an orderly takeover. It removes a great deal of the messiness about who was guaranteeing what and for how long. It should also mean that Northern Rock stops haemorrhaging money. No one was going to take it on while it still had those kind of liabilities."

With Northern Rock valued at less than £1.5 billion, a takeover would be a modest bite for any of the most likely bidders Lloyds TSB, Royal Bank of Scotland and Citibank.

But under pressure from the Financial Services Authority and Bank of England to mount a rescue takeover, the banks have become increasingly concerned about the risks they face.

The terms of last night's Bank of England guarantee and, indeed, its initial emergency loan have yet to be made public. The interest rate on the loan is very high at something like

7.2%, which is well above commercial interbank rates. Any serious bidder must by now have been made privy to the details of both packages.

The brand of Northern Rock is now seen by City analysts as virtually worthless. Merrill Lynch said: "The game is over for Northern Rock in its present form."

Its management and the business model which it created of borrowing cheaply from the money markets to lend to homebuyers are both now widely discredited. Management, under chief executive Adam Applegarth, would certainly be required to stay on for an orderly handover, but would then depart clutching contractual pay-offs amounting to several hundred thousands of pounds.

Northern Rock could be attractive to a number of European banks looking to move into the UK as Santander did three years ago with its £8.5 billion takeover of Abbey.

But those attractions are limited because it has only 76 branches, which may not be a large enough retail network for some buyers.

Any buyer will demand very detailed access to Northern Rock's books to examine the £113 billion of loans and mortgages which make up the assets on its balance sheet.

Some analysts believe the loan book is so precariously balanced that Northern Rock would have difficulty meeting the cost of its capital within two years.

Rival former building societies Alliance & Leicester and Bradford & Bingley, whose shares crashed 31% and 15% respectively yesterday, saw some recovery in their value today.

But they are both also seen as vulnerable. A&L has already held fruitless talks with French bank Credit Agricole at least once this year.