Northern Rock goes to Virgin

17th November 2011  

Northern Rock plc has today been sold to Virgin Money, the retail banking arm of Richard Branson’s Virgin empire for £747 million.

Northern Rock was the first financial institution to be partly nationalised following its near collapse in 2007, and its return to the private sector in some way marks the real beginning of the end of the credit crunch. Most people will remember the TV coverage of the queues of people waiting outside Northern Rock trying to get their hands on their savings which signalled the onset of the financial crisis.

The Government split Northern Rock into 2 separate entities in January 2010. This paved the way for the eventual sale of the business. Northern Rock plc is the business Virgin Money have acquired, and there remains Northern Rock (Asset Management) which the Government still owns. This business still holds some £50bn of loans which will be run down over the next 10 years. The exact scale of the toxic debt in this part of the business remains unclear but it’s understood to still owe the Treasury some £21bn. The Government has no plans to dispose of this business in the near future.

Until the outcome of these loans is definite, it won’t be possible to truly understand if Virgin’s Shareholders have got themselves a bargain for their £747m, or what effect this has on the final bill to the taxpayer for Northern Rock’s collapse. The sale of the good part of Northern Rock theoretically posts a £650m loss to the exchequer, as the Government originally pumped £1.4bn into the old Northern Rock business to keep it afloat.

Northern Rock will be rebranded Virgin Money as soon as the sale has been completed. Virgin has given an undertaking that there will be no compulsory job cuts for three years. Following suitable regulatory and European clearance, the sale should be completed by the end of 2011.

Virgin Money which has some 3 million Virgin Credit Card and savings customers now becomes a fully-fledged retail bank able to offer mortgages for the first time. Virgin has pledged not to close any of Northern Rock’s branches and indeed has said it plans to open more.

Virgin has already disclosed the fact that it plans to float the business on the stock market in 2 to 5 years’ time, and if it does this, the deal allows for the taxpayer to receive a further £280m. Virgin did try to acquire the business before in 2008 but wasn’t successful.

George Osborne, current Chancellor of the Exchequer, said:

“The sale of Northern Rock to Virgin Money is an important first step in getting the British taxpayer out of the business of owning banks. It represents value for money and will increase choice on the high street for customers. It also safeguards jobs in the north-east.”

Jayne-Anne Gadhia Chief Executive of Virgin Money said

“We think we have made a great offer. The great thing about this business combination is that the two businesses lock together very well.

“Virgin Money has credit cards, insurances and investments, and Northern Rock has mortgages, savings and current accounts.”

The Virgin Money – Northern Rock deal will send some shock waves through the board rooms of other High Street Banks. Not because other banks wanted to buy Northern Rock, we understand there were no other bids on the table, but because of Virgin’s fearsome reputation for shaking up dull and under-performing sectors. There is currently very little difference in the retail offerings of the top 5 retail banks in the UK. We can be sure if Mr Branson has his way, that will surely change!

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