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Monday, October 15, 2007

Virgin Takes a Punt on Northern Rock

Sir Richard Branson's Virgin group is trying to take a punt on the corpse of Northern Rock. Virgin has put together a consortium to take control of Northern Rock.

It is in the public domain that there are two other bidders for the Rock, private equity firm JC Flowers and hedge fund Cerberus.

Virgin's consortium includes AIG, the insurance company, and the London hedge fund Toscafund which is headed by the former Royal Bank of Scotland chairman Sir George Mathewson.

In order to boost its credibility, wrt being able to pull off the bid, the consortium are looking for a well respected banking veteran who could take control of the Northern Rock board and reassure regulators, politicians and the financial markets.

The Virgin wishlist, according to the Guardian, includes Sir Brian Pitman and Sir Peter Ellwood ex ceos of Lloyds TSB, former Bank of Scotland chief Sir Peter Burt and HBOS chief executive James Crosby.

The Virgin consortium says that it will inject around £1BN in cash into Northern Rock, together with the Virgin Money business (estimated to be worth £200M).

The consortium would be issued new shares, at a deep discount to the current price, giving it around 50% of the bank. The Northern Rock name would be killed off and the new bank would be called Virgin Money.

JC Flowers and Cerberus have made it clear that current shareholders would receive very little in the event of a takeover.

Given the public offers on the table, and the fact that the sharehodlers are clearly not going to receive very much, it is very surprising to see how the shares have rallied last week. This morning they have fallen by 27% to 199p.

However, anyone currently holding shares in this company must face the reality that the current price may now be incredibly volatile and not necessarily reflect the true "value" of the company; as Northern Rock is now the plaything of the speculators.

As I have already noted several times before, this share now strongly resembles the dying days of Marconi's listing on the FTSE.

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