Virgin gets 'good' Northern Rock for pound 747 mn

The British government’s treasury department on Thursday said it had decided to sell state-owned Northern Rock bank to Richard Branson’s Virgin Money for £747 million.

The deal is a finale to Branson’s dogged attempts to buy this beleaguered bank over the past two years that has seen a change of government from Labour to the current Tory-Lib Dem coalition. It had been taken over by the then government in February 2008, to save it from financial collapse.

Virgin Money, till now having remained a boutique retail financial institution, focusing on mortgage, credit cards, insurance and pensions, will now have its long-sought opportunity to emerge as a major high-street (retail) bank in Britain.

A statement from the Treasury said, “This is part of the government's wider strategy for the banking sector, with safer ring-fenced banks and more competition for customers. The combined business of Northern Rock and Virgin Money will establish a new competitor in the UK retail banking sector and, in doing so, will lead to an increase in choice for high-street customers.”

By the government's own estimate, this sale has caused the British taxpayer a loss of £400-600 mn. The government will receive £747 mn in cash on closing of the sale, with the potential in the future to receive over £1 billion in total, the Treasury added. The government is also expecting another £50 mn of cash within six months of completion. A further £150 mn will be paid in the form of a capital instrument and an additional cash consideration of £50-80 mn upon a future profitable share issue or sale in the next five years.

RIDERS, BACKGROUND
The deal comes with four basic conditions from the government, which Virgin Money will have to honour over the next few years. There will not be any further compulsory redundancies, beyond those already announced, for at least three years from completion of the deal; retaining and, over time, expanding the total number of branches; extending support for the Northern Rock charitable foundation for a further year; and making Newcastle the operational headquarters for Virgin Money, to allow employment opportunities to improve in the northeast of England.

Chancellor of the exchequer (finance minister) George Osborne said, “The sale of Northern Rock to Virgin Money is an important first step in getting the British taxpayer out of the business of owning banks. It represents value for money, will increase choice on the high street for customers, and safeguards jobs in the northeast.”

On February 22, 2008, the then Labour government of Gordon Brown had decided to nationalise Northern Rock, as a temporary arrangement. In January 2010, it was split into separate entities: Northern Rock, a new savings and mortgage bank, authorised as a mortgage lender by the Financial Services Authority and Northern Rock (Asset Management) -- the two divisions, later named the ‘good’ and ‘bad’ parts. In June this year, Osborne announced the decision to put Northern Rock up for sale.

Northern Rock currently employs 2,500 people, down from 5,500 at the time of its nationalisation. It has 70 branches. The bank reported a loss of £68.5 mn for the first six months of 2011, down from a loss of £142.6 mn in the same period a year earlier. It expects to turn around in the second half of 2012.