Kerching! Government pockets a tidy £747m selling Northern Rock to Virgin
The Government has announced this morning that it is selling the beleaguered Northern Rock plc to Richard Branson’s Virgin Money. The Treasury explained the deal as being “ in the best interests of the taxpayer, secures the long-term future of the company and will increase competition in the banking sector.” However, selling at a loss of at least £400m may not be everyone’s idea of a great deal*
The Chancellor actually announced back in June that Northern Rock was for sale, and the main point of the sale is, apparently, to stimulate competition in the retail banking market. He wants Branson to give RBS, Lloyds, HSBC, Barclays and Santander a run for their money. Literally.
But even after the deal, the new and engorged Virgin Money will still be a tiny mouse a tenth of the size of the big banks on most measures. But never let it be said that being a small underdog has ever stopped Virgin before.
So let's hope the deal does what it sets out to do, as otherwise it looks like the Government have been sold a bum deal. We, the taxpayers injected £1.4bn into the bank when it was saved by the Government, and today’s £747m deal, with the potential for an extra £280m more over the next few years, gives us a paper loss of somewhere between £650m and £400m. Ouch.
However, the deal will also safeguard jobs in the North East, as Virgin have agreed to make Newcastle the operational HQ for Virgin Money.
In addition, Virgin Money has committed to
- No further compulsory redundancies (other than already announced) for at least 3 years
- Retaining the current number of branches, with a view to eventual expansion, and
- Extending support for the Northern Rock Charitable Foundation
The Government will definitely receive £747 million in cash the sale date, with the potential in the future to receive over one billion pounds in total, plus an expected £50 million or so of cash within six months of completion. The Government also show they were not born yesterday, with further post-sale considerations payable in the form of a further £150m capital instrument and an additional cash consideration of £50-80 million should Virgin Money make a future profitable IPO or sale in the next five years.
The sale will not affect current retail banking customers of Northern Rock, who will carry on their banking as usual. They do not need to take any action and can continue to operate their accounts and contact Northern Rock as they do now. There are additionally no changes to terms and conditions as a result of this announcement.
Note also that the Government has no plans to sell Northern Rock Asset Management, which, together with Bradford & Bingley, was integrated under a single holding company, UK Asset Resolution. The state also still owns tens of billions of pounds of old Northern Rock mortgages, and depending what happens in the housing market as those mortgages are repaid, the paper loss could be wiped out. Or get worse.
* although it may be Richard Branson’s idea of a good deal.