Northern Rock plunges on cut-price bids

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Northern Rock on Monday warned shareholders that offers for the stricken mortgage lender were “materially below” its current share price, as the UK government indicated it would favour the bid that requires the least support from the authorities.

In a stock exchange announcement, Northern Rock confirmed it had received several “indicative expressions of interest” and said it expected several more in the next few days.

But the bank cautioned shareholders that they might not benefit from the offers. “The value to shareholders from any of the proposals (and indeed any of the other strategic options available to the company) remains highly uncertain and will be dependent, among other things, on when and if there is an improvement in market conditions including access to liquidity and the value created, if any, from the run off of the assets and liabilities remaining in the company following any disposal of all or part of its business,” it said.

The shares fell 27.6p, or nearly 21 per cent, to 105p in afternoon London trading.

The warning came as the UK government set out its priorities in the bidding process.

In a statement the Treasury said that “to the greatest extent possible”, the risks and costs of Northern Rock should be carried by its current and future shareholders. “Other things being equal, the authorities will view favourably proposals that minimise any residual involvement or funding from the public sector.”

Northern Rock has currently borrowed more than £20bn from the Bank of England, and none of the bidders for the bank are expected to be able to refinance fully the loan immediately. This means the government could continue as a creditor to Northern Rock for several years, potentially leading to scrutiny from the European Commission under rules governing state aid.

But the Treasury stressed it was keen to avoid this outcome: “All other things being equal, any proposal will be viewed favourably in so far as it is not conditional upon European Commission approval of further aid measures.”

Northern Rock is expected to receive eight to 10 proposals to take control of all or part of the bank. Sir Richard Branson’s Virgin group and Olivant, a private equity firm led by Luqman Arnold, former chief executive of Abbey National, are the only bidders to have publicly declared their interest.

However, Northern Rock is also expected to receive a proposal from JC Flowers & Co, the US private equity group. ING, the Dutch bank, and Apollo, the US buyout firm, are also thought to be interested. Cerberus, the US private equity group, initially expressed interest but it is unclear whether it plans to submit a proposal.

Though Northern Rock did not confirm the number or the identity of the bidders, it said proposals received so far fell in two categories. One option – favoured by Virgin – is to take control of the company by injecting new assets and capital into Northern Rock. The other is to buy part, but not all, of Northern Rock. Monday’s statement suggests that Northern Rock has not yet received any takeover bids for the whole bank.

The government’s desire to minimise its support for Northern Rock appears to undermine plans by the bank’s shareholders to press for the sale process to be halted in favour of installing a management team led by Mr Arnold.

SRM Global, a hedge fund run by former UBS trader Jon Wood, and other institutional shareholders are expected to put forward their proposals to Bryan Sanderson, Northern Rock chairman, this week.

Mr Arnold wants to put in its own management team and take control of the company, in return for the right to buy a minority stake.

SRM and RAB Capital, which account for about 13 per cent of Northern Rock, have called for the auction process to be halted to prevent the bank being sold on the cheap.

Jon Wood of SRM said: ”Now is not the time to sell the bank, but to work instead with the government on a restructuring from within and pay it back over a period of time.”

RAB Capital said: ”There’s no point attempting to rush through a sale in current market conditions. It is not as if the Bank of England is subsidising this anyway, it is making good money out of it.”

Mr Arnold’s plan has won support from some shareholders because he would take a stake in the bank alongside the other large investors. ”He would have skin in the game to show his willingness to rebuild Northern Rock,” one investor said.

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