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Government sells Northern Rock to Virgin Money
(Update) The Treasury will sell 100% of its share capital in the bailed-out bank, but hold onto the bad bank.
The government has sold its holding in Northern Rock to Virgin Money for £747 million in what chancellor George Osborne described as a 'first step in getting the British taxpayer out of the business of owning banks'.
The deal is only for Northern Rock's 'good bank', the mortgage and savings provider, not the toxic asset-holding 'bad bank' which remains entirely in government hands.
Northern Rock was nationalised in 2008, to the dismay of shareholders, after a run on the bank. The government put £1.4 billion into the business. It put the business up for sale in June this year, attracting a proposal from Richard Branson's Virgin Money along with a number of other parties.
Virgin Money plans to phase out the Northern Rock brand by 2012. But Osborne sought to reassure existing Northern Rock customers that they would not be affected by the deal. 'Customers don't have to do anything. Their bank accounts will be taken over by Virgin Money'.
Virgin Money has promised to make no compulsory redundancies beyond those already announced by the company for at least three years from completion, while the total number of Northern Rock branches will be retained.
The deal, which is expected to be completed in January, involves an initial payment to the Treasury of £747 million cash on completion, but could eventually yield £1 billion for the government. Around £50 million more cash will be paid within six months. Then Virgin Money will issue the Treasury with Tier 1 Capital Notes with a par value of £150 million and an annual coupon of 10.5%. The Treasury expects to receive an additional cash consideration of £50 to £80 million after a stock market listing or sale in the next five years, dependent on market conditions.
Keith Morgan of UK Financial Investments (UKFI), the body that manages the government's stakes in the country's bailed-out-banks, said today: ‘The deal returns Northern Rock to the private sector and maximises value for taxpayers.’
Impact on Lloyds branches sale
Simon Willis, analyst at Daniel Stuart, said it was ‘good news’ that the government had completed the deal.
‘It’s good for Virgin Money as it gives it a major leg-up in market presence, and it shouldn’t have much impact on the sale of the Lloyds branches as Virgin Money was not a front-runner,’ he added.
Branson said earlier this year that he wanted to take control of the hundreds branches that Lloyds (LLOY.L) has been told to sell by European authorities.
But so far, NBNK (NBNK.L) – the new banking venture formed by former Lloyd’s of London chairman Lord Levene – has been the only prospective buyer to make a formal offer for the 632 branches. The Co-operative group is another potential bidder for the business.
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