Northern Rock shares keep uncertain status

Northern Rock shares provide no certainty about the battered mortgage lender's future, but made up some ground as a U.S. private equity firm emerged as a potential buyer for the entire business.

Photo: Northern Rock shares keep uncertain status

In contrast to the other two bids on the table from Virgin Money and Olivant Advisors, J.C. Flowers plans to keep the lender intact and operating under its current name.

The news helped Northern Rock claw back some of its losses from a big dive in its shares early in the trading session.

Trading in the stock was temporarily suspended by the London Stock Exchange when sellers sent shares spiraling down more than 40 percent to 60 pence (US$1.24; 0.84 EUR), valuing the company at just over 250 million pounds (US$515.3 million; 351.6 million EUR).

The sales rush was spurred by comments from the company Monday that prospective bids were well under the current share price. It also followed a report Tuesday that U.S. private equity house Cerberus was no longer interested in making a bid. But a Dow Jones Newswires report after the market close said that Cerberus had in fact made an offer.

The shares closed below the 100 pence (US$2.06; 1.39 EUR) mark for the first time but pared back the losses to a 6.9 percent fall at 97 pence (US$2.00; 1.35 EUR), valuing the company at around 407 million pounds (US$8.40; 5.68 EUR).

Northern Rock was valued at 5.2 billion pounds at its stock market peak in February.

British Treasury Chief Alistair Darling, who has come under increasing pressure amid concerns that the virtual collapse of the lender will cost taxpayers, has said the government will ensure the "public interest is safeguarded" by exercising its right to veto a deal if necessary.

Darling's warning that the support provided by the government so far - estimated by analysts to be worth around 24 billion pounds (US$49.2 billion; euro33.6 billion) - could be limited under EU rules also represents a potential stumbling block to a Flowers deal.

The Flowers plan is contingent on ongoing funding from the Bank of England to 2010, which in total should not exceed the 10 billion pounds (US$20.6 billion; 14.1 billion EUR) remaining after the 15 billion-pound (US$30.9 billion; 21.1 billion EUR) repayment, the source said.

However, the government has been advised that its support, extended in September when the global credit crisis left the lender without funding from the short term money markets, could represent state aid under EU rules and therefore may be illegal if continued beyond the allowed six months, which end in February.

The Flowers bid also includes 15 billion pounds (US$30.9 million; 21.1 million EUR) in debt finance that will be used to repay part of the Bank of England's loan to the stricken mortgage lender and an injection of just over 1 billion pounds (US$2.1 billion; 1.4 billion EUR) in new equity to refinance the company's balance sheet, the source said.

Cerberus has submitted a proposal involving U.S. financial services firm General Motors Acceptance Corp., in which it has a 51 percent stake, according to a Dow Jones Newswires report citing a person familiar with the situation.

The report added that it was unclear whether Cerberus' proposal involved buying all or part of the bank and what plans it has for repaying the Bank of England's debt.

Virgin Money, which is backed by entrepreneur Richard Branson, also plans to keep Northern Rock as an ongoing concern and repay a significant proportion of the Bank of England's debt. However, it would rebrand the business as Virgin Money.

"With all the uncertainty around, we'd like a quick decision," Branson said Monday. "If Northern Rock's going to be rescued, it needs to be rescued quickly."

Investment group Olivant plans to take a minority stake in Northern Rock and restructure the lender "to size it to its natural funding and operational capacity." Headed by former Abbey chief executive Luqman Arnold, Olivant plans to parachute in a heavyweight management team to turn around the company.

Cerberus and Flowers declined to comment.