Sir Richard Branson's Virgin Group PLC would take a huge step toward building its international consumer financial services business if the company succeeds in its bid for a stake in the U.K. mortgage lender Northern Rock PLC.
On Friday, Virgin said it was leading a consortium that had offered to pay a "substantial cash sum" and contribute its U.K. Virgin Money business to Northern Rock in exchange for an equity stake. Northern Rock would assume the Virgin Money name, and Virgin Money's chief executive, Jayne-Anne Gadhia, would take the helm.
"Northern Rock must seek a complete rebranding to repair its franchise and the confidence of its stakeholders if it wishes to continue as a stand-alone business," the consortium said.
The bid came five months after Virgin made its first foray into financial services in the United States by buying a majority stake in CircleLending Inc., a Waltham, Mass., peer-to-peer lending company whose chief executive said it would be a "launching pad to brand Virgin in the U.S." (Circle-Lending is set to announce Monday it is adopting the Virgin brand.)
Sir Richard, who is scheduled to speak Monday at the Mortgage Bankers Association of America's annual convention in Boston, said in a press release: "We are determined to preserve one of the last remaining truly independent, U.K.-owned competitive forces in banking, mortgages, and other financial services."
Northern Rock, which relies heavily on wholesale funding, was forced to seek a bailout from British regulators last month after getting caught in the worldwide credit crunch. The news triggered a deposit run on the bank.
"The reconfigured Virgin Money will quickly rebuild a deposit base to drive a more stable funding structure," the consortium said.
Virgin Money manages about $5 billion in customer savings and has 1.5 million credit card customers. The British operation stopped offering mortgages in 2001 when it sold its position in a joint venture to its partner, Royal Bank of Scotland Group PLC.
Virgin Money also has operations in Australia and South Africa that would not be included in the proposed transaction.
In May, Asheesh Advani, CircleLending's founder and CEO, said that Virgin tends "to pick industries that are overly regulated or very traditional in their approach, and financial services" fills the bill.
Northern Rock, which has acknowledged that it has "received a number of approaches regarding a variety of potential transactions," declined to comment specifically on the Virgin proposal.
In the year's first half Northern Rock did about $35 billion of residential lending, accounting for a 9.7% share of the U.K. market.
The Virgin-led consortium said it intends to maintain Northern Rock's stock listing and to "retain the business in its entirety … rather than seeking a breakup or partial solution."
"The proposal is centered on the quickest possible solution to restore public confidence in the business and return it to profitable growth," it said.
Last week Northern Rock said it had struck a deal with regulators to extend guarantees to new retail deposits, which, along with a secured borrowing arrangement with the Bank of England, would give it breathing room "to pursue the full range of its strategic options," a process it expects to finish by February.
In a research note, James Hutson, an analyst at KBW Inc.'s Keefe Bruyette & Woods Inc., wrote that the "new deposit guarantee and speculation of support from major investment banks may even spark discussion of a stand-alone option for the bank, albeit on a reduced scale."
In addition to Virgin, the consortium includes American International Group Inc., W.L. Ross & Co. LLC, Toscafund Asset Management LLP, and First Eastern Investment Group.
Michael Trippitt, a London analyst at Oriel Securities Ltd., said overtures by groups like the Virgin consortium show that the bleakest predictions for Northern Rock are off the mark. "People are … waking to the fact that the model isn't broken because there's a lot of interest suddenly," he said.
Still, he said, "the pricing of risk has clearly changed," and "without a doubt, the Northern Rock brand is damaged."
Proposals like Virgin's, which show sensitivity to the "roots of Northern Rock — the employees, the community" in northeastern England — are likely to "get a more sympathetic hearing" from British regulators, he said.
