Shareholders Balk at Virgin Bid

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With his shock of blond hair, deep tan and rakish English charm, billionaire entrepreneur Richard Branson likes to portray himself as maverick of the business world. And, on Monday, he made a typically bold gesture, announcing that he would lead an investment consortium to rescue the ailing U.K. mortgage lender Northern Rock. In an open letter to Northern Rock customers entitled "A Fresh Start," he pledged to save the bank and declared that the company would soon be known as Virgin Money.

But even as the takeover bid was welcomed by the Northern Rock board and the British government, shareholders small and large indicated they may block Branson's bid, a move that could protract efforts to save this high-profile casualty of the global credit crunch, and cause a full-blown political crisis for Chancellor of the Exchequer-turned-Prime Minister, Gordon Brown, who has already seen his reputation for fiscal prudence damaged by the affair.

Branson, whose consortium includes U.S. billionaire investor Wilbur Ross, hedge fund Toscafund and the First Eastern Investment Group, proposes an injection of $2.69 billion of new cash into Northern Rock, with half of that investment from the consortium. The remainder would be raised through an offer to existing shareholders to buy new shares for 25 pence (52 cents) eachÜas opposed to a share price that reached 110.1 pence ($2.28) on Monday during turbulent trading. The offered price values Northern Rock at $413 million, which is considerably less than its current market value of $960 million.

Many shareholders arenıt happy. According to Robin Ashby of the Northern Rock Small Shareholders Group, an "overwhelming majority" of shareholders at a meeting on Monday in the northern English city of Newcastle where the lender is based, agreed in an informal vote that Bransonıs offer undervalued the company. Shareholders still have the power to block a sale because the bank has not officially been declared insolvent, despite its reliance on an approximate $47 billion bail out made by the Bank of England in September, when Northern Rock revealed its financial difficulties. "The directors need to be aware that they are not going to get the votes unless they are going to need unless they bring forward a fair deal," Ashby says." Shareholders will not simply roll over." Small shareholders hold around 25% of Northern Rock but, straw polls aside, they are not a unified body.

A bigger worry for Branson is that some larger shareholders are coming out against the deal. Philip Richards, CEO of the hedge-fund RAB Capital, which owns 6.5 % of the bank, released a statement saying, "We do not believe that this proposal reflects the true value of Northern Rock and we would expect either that this proposal be improved or that alternative proposals be brought forward."

Shareholder dissatisfaction now sets up a showdown with Britain's Treasury, the Bank of England, and the Financial Services Authority (which support the deal in large part because it promises an immediate repayment of $22.7 billion of the $47 billion bail-out). Should shareholders block the takeover, and no other suitable bidders are found, the British government could decide to nationalize the bank or force it into bankruptcy, stripping shareholders of their investment. Either resolution would further embarrass a government still reeling from criticism of its handling of the early stages of the crisis. In September, nervous pensioners withdrew $4.14 billion in less than a week despite the government's extravagant bailout package, and reassurances from the Prime Minister that the bank was solvent. Eventually, only Chancellor of the Exchequer Alistair Darling's statement that the government would guarantee all deposits at the bank stopped the run.

If shareholders are unhappy with Bransonıs bid, however, it is unclear where they might find a better one. The U.S.-based private-equity firm JC Flowers has also promised to repay billions of pounds of the Bank of England loan upfront, but its proposal offers shareholders only around 1 pence per share. Another investment firm, Olivant, has proposed buying a minority stake while parachuting new management in, a plan that would keep share prices at higher levels. But with the British government having already plunged billions of dollars into the bank, it will want to retain a say in any potential deal. Which means that Northern Rock shareholders might not like Branson's proposed deal, but it may prove the best offer they get.