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Last Updated: Monday, 26 November 2007, 19:02 GMT
Virgin's Rock bid may be blocked
Northern Rock sign
Northern Rock's future is looking less bright, analysts say.
A main investor in troubled lender Northern Rock says that it will oppose Richard Branson's Virgin Group's bid for the bank because it is too low.

Virgin was earlier named as Northern Rock's preferred buyer, a move that had been backed by the Treasury.

However, Rab Capital, which is the second-largest shareholder in Northern Rock, said it would oppose the move.

Should a takeover fall through, then the bank could be nationalised or put into administration.

Rab, which owns about 6.7% of the bank, told the BBC that Virgin's offer was "cheeky" and that the value it put on Northern Rock was "too low".

BBC business editor Robert Peston said that opposition represented "a major obstacle for Virgin and an embarrassment for the Rock board".

Northern Rock's shares rose 29% to 110.1 pence, and had climbed as much as 48% during earlier trading.

This stock is not for the faint hearted and the range of outcomes for shareholders is very wide
Nic Clarke of Charles Stanley

Despite the big rise in Northern Rock's share price, some analysts cautioned that it was not yet certain whether it represented a good buy for investors.

"This stock is not for the faint hearted and the range of outcomes for shareholders is very wide," said Nic Clarke, an analyst at Charles Stanley.

New name

Newcastle-based Northern Rock hit funding difficulties in September after world credit markets dried up, and it was required to go to the Bank of England for emergency loans to cover its day-to-day funding requirements.

Northern Rock market capitalisation
1 Jan Northern Rock starts the year in apparently good order
14 Sept Markets react to the news of the Bank of England's support for Northern Rock
23 Nov Northern Rock's market value stands at 362m
26 Nov Virgin values Northern Rock at 200m

The Virgin offer proposes an injection of 1.3bn of new cash into the Rock, with half of that money coming from the consortium.

The remainder would be raised through an offer to existing Rock shareholders to buy new shares for 25 pence each.

On that basis, Virgin values Northern Rock at 200m, considerably less than its current market value of 362m.

Virgin would end up with 55% of the new company, leaving current shareholders with 45%.

The new business would be rebranded Virgin Money, though it would keep its existing stock market listing.

Under the terms of the deal, Virgin's would immediately repay 11bn out of the 25bn Northern Rock owes the Bank of England.

Virgin will then repay the remaining 14bn of Treasury loans over the next three years.

'Difficult times'

The Virgin-led consortium has also informed the Rock that it has no current intention of making "any material reduction" in employment in Northern Rock.

It also says that it intends to continue operating the business from Newcastle-upon-Tyne.

BBC business editor Robert Peston
Branson could not profit from our misery, even though some will doubtless accuse the Treasury of using our money to help him make spectacular potential long-term gains
The BBC's Robert Peston

Northern Rock chairman Bryan Sanderson, described the proposed deal as "very good news" for the bank.

"Over the last few weeks and months we have looked at the issues from the perspective of all stakeholders," he said.

"I am grateful for the support that we have had from customers and employees who have stayed loyal to us during these difficult times - and pleased that a solution that firmly restores the company's prospects has been identified.

"Furthermore our retail depositors can be fully reassured that the government has said it will ensure savers' money is safe whatever the outcome."

Of the ten expressions of interest from financial institutions in taking control of Northern Rock, Virgin's was said to be preferable because it offered the best deal to the beleaguered lender's shareholders.

Not happy

A number of other shareholders also could create problems for the Virgin bid. The biggest shareholder is a hedge fund SRM Global, while at the other end of the scale is a group representing individuals with small holdings.

"If we feel that we are being entirely ripped off, ripped out, kicked out of the long term, then shareholders may not be happy to just to roll over and go along with these people who it has been reported are preferred bidders," said Robin Ashby of the Northern Rock Small Shareholders Group.

If Richard Branson is interested in Northern Rock this means the company is quite viable, so why is it being sold off?
Alan, Wigan

BBC business editor Robert Peston said Virgin has agreed it will only pay itself "normal" dividends from Northern Rock until all public money is repaid - thus avoiding the potential embarrassment for the Treasury of the group making spectacular profits with the help of the taxpayer-backed loan.

Yet our correspondent warned that if there was a severe housing market recession over the next two or three years, taxpayers may not get all of their 25bn back.

"The equity Sir Richard is putting into the business - including more than 200m of his own money - would be wiped out in those circumstances," Mr Peston said.

"In other words, he could not profit from our misery, even though some will doubtless accuse the Treasury of using our money to help him make spectacular potential long-term gains."

Small shareholders meet to discuss Virgin's bid

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