US private equity firm could rescue Northern Rock

by Richard Kilner

Story link: US private equity firm could rescue Northern Rock

The imperative that a decision regarding embattled bank Northern Rock’s future happens quickly was asserted again last night, in the hopes that a bidder, perhaps US private equity firm JC Flowers, might take it on as a going concern.

The bank’s share price has been tumbling over recent months following the massive emergency loan issued by the Bank of England due to the credit crunch dramatically damaging Northern Rock.

It is speculated that JC Flowers intends to invest £15bn from a consortium, and repay the £25bn loan by the end of 2010.

Flowers has a good reputation for taking over troubled businesses and restoring them to stability and profitability, bringing the private equity firm lucrative financial rewards. The firm is led by Chris Flowers, previously a partner at Goldman Sachs before leaving to set up the firm.

Should JC Flowers takeover Northern Rock it would be the first large deal in the UK for the private equity business.

The government has sought to steady the troubled bank with a loan of taxpayers’ money thought to be £25bn.

Despite this the shares of Northern Rock have plunged in value over the last few months, dropping by 40% in early trading yesterday before rallying to finish just 6.9% down on the start of trading at a cost of 97p per share.

Should JC Flowers takeover the firm, it is reported to be planning a £1bn investment to improve the balance sheet, and also to underwrite a fresh plan for the business.

Under the plans the Northern Rock name would be retained, as would its presence in the northeast of England, though it is unclear exactly would impact there would be on the 6,000 members of staff the bank currently employs.

Chancellor Alistair Darling is looking for somebody to takeover the firm as an ongoing concern, and is likely to be pleased that another interested party has come forward with such a proposition.

The other choices on offer are less appealing to the Chancellor, and include closing the bank altogether, nationalising it or breaking the business up and selling it on.

There are a number of other groups interested in Northern Rock, including Virgin and Olivant. Virgin would rebrand the bank to become part of its Virgin Money business, whereas Olivant would take a minority stake and introduce an expert team of managers in an effort to transform the bank’s fortunes.