Northern Rock could beef up Virgin Group

Northern Rock could beef up Virgin Group

Sir Richard Branson has a knack for knowing his audience. That skill has put him in line for another prize—Northern Rock Plc.

His consortium has been named as preferred bidder for the ailing UK bank, in front of a formidable list including Dutch bank ING Groep NV and US private equity firms JC Flowers & Co. Llc. and Cerberus Capital Management LP.

JC Flowers’ proposal looked better for the taxpayer. The private equity firm would repay upfront £15 billion (Rs1.23 trillion) of the more than £20 billion that the UK has lent the Rock. Branson is offering to hand back only £11 billion for now. But he has offered something for everyone. Shareholders get a going concern. That cuts the chances of them tripping up the deal.

The government gets to minimize the potential political fallout. With the Rock still going, albeit under the Virgin name, it avoids job losses in the North East and keeps the bank’s charitable foundation afloat. And by capping the consortium’s returns until it gets its money back, the government avoids potential embarrassment should the Rock rapidly return to health.

The return limit may not be all that hard on Branson. Sure, there’s a big potential gain from turning the Rock around. But that’s the difficult bit. The consortium needs to win over shareholders, keep write-offs down and have funds in place at a reasonable rate.

Branson looks to be in the money already. In getting a £250 million valuation on the Virgin Money operation he is putting into the deal, he has got it a staggering valuation of 35 times historic earnings, or 10 times assets under management.

What’s more, he has put extra oomph behind the Virgin name. Even if the deal doesn’t go through, he will quit with the brand ahead. If he wins, that advantage will be even greater. A stack of the marketing millions spending renaming Northern Rock will rub off on his Virgin brand. The returns cap on the bank will be looser for him than other members of his consortium.