Northern Rock to become Virgin Rock?

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Shares in Northern Rock broke back through the £1 barrier today after Sir Richard Branson’s Virgin Group was named as the frontrunner in bid talks to rescue the stricken mortgage lender.

The shares raced more than 28 per cent higher, up 24.1p at 110p, despite Virgin's bid plan valuing the bank's equity at just 25p.

Dealers said short-selling was behind some of the shares push but also noted that other bidders were still in the frame and could still try to sabotage a Virgin takeover of the bank.

JC Flowers, the American investment group, and the Olivant team led by Luqman Arnold, former Abbey chief, have also been involved in talks to secure control of Northern Rock.

It came as SRM Global, a hedge fund run by former UBS trader Jon Wood, increased its Rock stake to 6.84 per cent, from 6.44 per cent late last week.

SRM has called on Northern Rock to hold an emergency meeting to allow shareholders to vote on any sale of the bank, to prevent it being sold off on the cheap.

In a statement, Northern Rock said it wanted to take forward talks with Virgin on an "accelerated basis" and promised that it has "no current intention of making any material reduction" in headcount. Northern Rock employs 6,000 staff.

Despite an upfront payment of £11 billion, the consortium will still have to repay a further £14 billion Northern Rock has been forced to borrow from the Bank of England to keep it afloat.

Today’s statement said “…the Bank of England will have a clear path towards a payment in full”.

It is likely the Virgin consortium will take up to three years to repay the remaining debt. This means that the Government will have to seek approval from the European Commission to continue providing state aid to Northern Rock past the current deadline of February next year.

The plan proposed today will mean that Virgin Money, the group’s personal finance operation, will merge with Northern Rock.

Some £1.3 billion of cash will be pumped into Virgin Money, valuing it at about £250 million, and in return the Virgin consortium will take a stake of no more than 55 per cent.

The cash injection will be followed by a discounted rights issue, which is likely to prove controversial with existing shareholders because it will value the new shares at 25p each.

Virgin’s consortium includes a number of parties such as Wilbur Ross, the American distressed debt investor, AIG, the insurance giant, Toscafund, a hedge fund, and First Eastern Investment Group, a Hong Kong-based finance house It is backed by RBS and Citigroup.

Sir Brian Pitman, the former Lloyds TSB chief executive, has been named Rock’s chairman.

Jayne-Anne Gadhia has been confirmed as chief executive. She will be advised by Sir George Mathewson, the former chairman of RBS.

Bryan Sanderson, the chairman of Northern Rock, said in a statement this morning: "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."

The statement said that the consortium expects to rebuild a deposit base quickly and is targeting a credit rating of no less than 'A'.

The consortium have also pledged that the the Northern Rock Foundation, the charity associated with the bank, will continue to receive a share of profits.

Virgin promised up to five annual payments of as much £10 million each "in recognition of the contribution of HM Treasury and the Bank of England to the restructuring of Northern Rock."

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