Unless a high street bank decides it wants
to enter the fray for Northern Rock, the stricken Newcastle-based
mortgage lender is very likely to be sold to either Sir
Richard Branson or Christopher Flowers.
For the Government,
which will make the final decision about the sale as it
has ploughed £13bn of taxpayers'
money into the bank, the choice is between Britain's best-known
entrepreneur, whose Virgin brand is plastered across everything
from trains to mobile phones, and a US private equity group
which stays out of the limelight.
The task before the two
competitors is to persuade the Government, the Financial
Services Authority and Northern Rock's management that
they can offer a deal which is both politically acceptable
? safeguarding jobs particularly in the north-east and
continuing to fund the company's charity ? and financially
robust.
One person close to the dealings said: "Neither
Flowers nor Branson is the Government's first choice. But
as Lloyds TSB and others could not be persuaded to bid,
this is it."
The battle lines between the Branson empire
and Mr Flowers' company, JC Flowers, are clear: brand,
management and financing.
On the face of it, brand is Virgin's
strongest card. As one of Britain's best-known brands,
Virgin hopes that renaming Northern Rock as Virgin Money
will inspire confidence in people to entrust the bank with
their savings, which would help rebalance its funding away
from wholesale markets towards retail deposits.
On the negative
side, banking insiders said Virgin had not broken into
financial services in the way it had in other sectors and
added that the brand would have little impact with international
investors.
Virgin has pledged to keep Northern Rock intact
and to continue to fund its charitable foundation. Both
promises were "likely to play well with the political dimension",
noted Ben Ashby at JP Morgan.
Yet, in the City, Virgin faces
a rising tide of questions over how it would finance the
bid and whether it can put together a management team with
sufficient experience to overcome the crisis of confidence
the business faces.
Virgin dealt with early scepticism that
its tilt at Northern Rock was merely a publicity stunt
by unveiling a consortium which would take equity stakes
in Northern Rock, including US buy-out specialist Wilbur
Ross and British hedge fund Toscafund. But the group is
still trying to sign up financiers who would help pay back
the £13bn borrowed from the
Bank of England plus extra cash to put Northern Rock on
to a surer footing.
Virgin could yet sign up one or several
large banks not currently involved in the situation as
advisers and providers of cash, but at the moment many
believe its group looks lightweight.
The same view is held
about its management team, which would be led by Virgin
Money's chief executive, Jayne-Anne Gadhia. Ms Gadhia's
supporters argue she is a passionate leader of people and
capable of taking on the demanding role of stitching together
Virgin Money's existing business with Northern Rock.
Banking
insiders said it was not clear Ms Gadhia that had the necessary
experience and noted that she would have to convince the
FSA, which is smarting from criticism of its own role in
Northern Rock's implosion, that she was up to the job.
Virgin is still searching for a chairman of the business.
With
all eyes on Virgin, the Flowers camp ? led in Europe by
ex-Goldman Sachs banker Ravi Sinha ? is quietly assembling
its proposal.
Flowers is understood to have commitments
for £15bn
of funding from banks including JP Morgan.
The challenge
for Flowers will be to persuade the Government it would
not face a huge backlash from politicians if it sells to
private equity.
While many of the Branson businesses are
privately held, Virgin has pledged to keep Northern Rock
listed on the stock market. Flowers would prefer to take
the business private, though it has not ruled out keeping
a public listing. Flowers is also likely to offer something
to the Northern Rock charity, but probably not what it
currently receives.
Flowers is likely to face questions
over the money it has made from previous deals, most notably
its acquisition of the failing Long-Term Credit Bank of
Japan. The deal was highly lucrative for Flowers and its
partner, Tim Collins' Ripplewood, and prompted some in
Japan to ask why outsiders were allowed to make such handsome
profits from the situation.
Flowers will have to work hard
to find an answer to the brand question. It may opt to
keep the Northern Rock name for business done through loyal
customers in branches in the north-east, but change it
for an internet offering and business done in the wholesale
market.
Flowers may argue that in the case of Long-Term
Credit Bank, others were free to bid, but did not, opening
the way for the group to make a huge profit in return for
a big risk. It believes that Northern Rock presents a similar
opportunity.
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