Rock decision expected mid January

Troubled Northern Rock buys time with Olivant, an investment firm and one of two live bids for the bank, by offering access to the three financing banks working with rival bidder Virgin.

The UK Government and the board of the embattled bank Northern Rock are working to a mid-January deadline to decide whether to accept one of two bids on the table; to nationalise the bank; or to force it into administration.

A source close to one of the bids said Olivant, a private equity firm bidding for stricken UK bank Northern Rock, had pushed the board  in a letter to the board on Wednesday for clarity on the timetable of the bid and for parity with rival bidder Virgin Money.

Luqman Arnold

He said Olivant had been told in a meeting yesterday a decision before Christmas was impossible, but mid January was a likely deadline. The private equity firm, headed by former Abbey chief executive Luqman Arnold, was also given access to the financing banks, said to be Citi, Deutsche and RBS, working with the preferred bidder Virgin Money.

Olivant, which had been battling to have its bid recognised by the bank, was satisfied to find itself on level terms and has agreed to stay in the process to mid-January. The source said: “It effectively is a two-week extension and operationally nothing will happen to the bank in that time. Quick and decisive action is what Olivant called for.”

Quick and decisive action called for

Olivant

He said the UK Government, the Financial Services Authority and the Bank of England were still committed to a private sector solution, but they were also preparing the way for a nationalisation of the bank, as a fall-back position, if necessary.

Olivant has revealed it plans to provide £150 million (€208.3 billion; $304.8 billion) of equity for a stake in Northern Rock. It will tap the public markets for between £450 million to £650 million and parachute a management team into the Rock, according to a statement. 

It said its financing will be arranged by Northern Rock with the assistance of Olivant’s capital markets team, allowing it to repay £10 billion to £15 billion of the existing Bank of England’s more than £20 billion loan. Olivant would commit to repay the remaining Bank of England debt by the end of 2009.

Olivant’s proposals will allow it to issue high premium warrants for more than 7 percent stake in the company, while the Bank of England will receive warrants of 5 percent on the same terms as Olivant.

Arnold’s firm has received non-binding letters of commitment from five institutional shareholders representing approximately 23 percent of the shareholder base in Northern Rock to take up rights. The five shareholders have also said they would sub-underwrite around £440 million of the issue at or around the current market price. 

Sir Richard Branson’s Virgin Money bid is being funded with £1.3 billion (€1.8 billion; $2.7 billion) of equity and will see the Virgin Money business, which is valued at around £250 million, rolled into Northern Rock.  The consortium plans to rebrand the business as Virgin Money and has invited existing shareholders to participate by providing half the equity at £0.25 per share.

The consortium will take a stake of up to 55 percent. It has guaranteed not to break up the business, which will continue operating from Newcastle-upon-Tyne in the North-East of England. It would pay down £11 billion of Bank of England debt up front.