Bloomberg News

Virgin to Buy U.K.’s Northern Rock for 747 Million Pounds

November 18, 2011

(Updates with government loan in ninth paragraph.)

Nov. 17 (Bloomberg) -- Billionaire Richard Branson’s Virgin Money Holdings U.K. Ltd. is to buy Northern Rock Plc for 747 million pounds ($1.2 billion), marking the first sale of a British government bank holding since the 2008 financial crisis.

The government will also receive 50 million pounds in cash within six months, 150 million pounds of Tier 1 capital notes and as much as a further 80 million pounds in cash in the next five years subject to a profitable initial public offering, U.K. Financial Investments, which manages the government’s stake, said in a statement today. That would bring the total to as much as 1.03 billion pounds, nearly 400 million pounds less than the sum invested by the government.

The sale leaves the taxpayer with stakes in three other banks, including Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc. Chancellor of the Exchequer George Osborne, seeking to plug a budget deficit equivalent to 9 percent of gross domestic product, said today the decision marked the beginning of the taxpayer’s withdrawal from banking.

“The sale of Northern Rock to Virgin Money is an important first step in getting the British taxpayer out of the business of owning banks,” Osborne said in an e-mailed statement. “It represents value for money, will increase choice on the high street for customers and safeguards jobs.”

Deal Completes

Virgin Money will move its headquarters to Newcastle, Northern Rock’s base, and will not impose any compulsory redundancies in the three years following the purchase. It will maintain the same number of branches, which will be re-branded as Virgin Money when the deal completes at the end of the year. The Unite trade union said the bank has cut about 3,000 jobs since nationalization and sought assurances that no more jobs will go.

The Northern Rock deal does not suggest the government is any closer to selling its stakes in RBS or Lloyds as that’s “seen as being quite a way down the line,” said Simon Willis, a banking analyst at Daniel Stewart Securities Plc in London. The Northern Rock deal will give Virgin “a big leg-up,” in the U.K. banking market.

The government injected 65.8 billion pounds of capital into RBS and Lloyds during the financial crisis and took stakes in the two banks. The shares have since declined, giving the U.K. a paper loss of more than 39 billion pounds on the two holdings.

Taxpayer Capital

After the takeover and re-branding of Northern Rock, Virgin Money will add about 1 million customers to its 3 million existing customers, the lender said. Virgin Money said the deal is part-funded by WL Ross & Co., a New York-based investment firm.

In January 2010, Northern Rock Plc, the consumer bank, separated from Northern Rock Asset Management Plc, and received 1.4 billion pounds of capital from taxpayers. NRAM still holds 20.7 billion pounds of money lent by the government at June 30, having received a 27 billion-pound loan in 2007 and reported a 239 million-pound profit for the first half of this year.

The sale price is lower than the bank’s book value of 1.1 billion pounds at the end of June. The 46-members of the Bloomberg 500 Banks and Financial Services trade at an average price-to-book ratio of 0.67 percent.

U.S. private-equity firm JC Flowers & Co. and NBNK Investments Plc, run by Peter Levene, also submitted bids for the bank which the U.K. government took over in February 2008.

“The deal returns Northern Rock to the private sector and maximizes value for taxpayers,” said Keith Morgan, head of Wholly Owned Investments at UKFI.

Northern Rock Plc reported a loss of 68.5 million pounds for the six months to June 30 from 142.6 million pound-loss for the same period a year earlier. It said it expects to post a profit in the second half of 2012.

--With assistance from Howard Mustoe in London. Editors: Francis Harris, Jon Menon

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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