Northern Rock bail-out in numbers

Headlines were full today of the news that Virgin Money is buying nationalised bank Northern Rock for a cash consideration of £747m, with post-sale conditional payments potentially taking this figure past £1bn.

This is the figure that George Osborne said he was targeting when he announced the government’s intention to sell Northern Rock in his Mansion House speech in June. The sale could lead to the disposal of the public stakes in Royal Bank of Scotland and Lloyds Banking Group next year.

But while, the sale seemingly hit treasury targets, it is worth examining how the price stacks up compared to the money invested by the taxpayer, as well as previous buy-out approaches.

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Taxpayer investment

The government invested a total of £1.4bn into Northern Rock after nationalising the bank in 2008, following a run that was prompted by speculation over a lack of liquidity prompted by credit markets becoming squeezed.

At face value this would mean the Virgin deal represents a loss on the investment, which is true in cash terms at this point, but the deal only includes the ‘good bank’ of Northern Rock, which comprises the high street branches but not the legacy mortgage loan book.

The mortgage book forms the so-called ‘bad bank’ of Northern Rock - also known as Northern Rock Asset Management - which will remain owned by the taxpayer.

However, it is entirely possible that there will be a sale of the ‘bad bank’ in the medium term, which could itself generate a relatively considerable sum.

Earlier this year UK Asset Resolution, the holding company established to bring Bradford & Bingley and NRAM together in 2010, reported that Northern Rock’s legacy business moved back into the black last year, posting a pre-tax profit of £277.4m.

It is therefore still possible for the overall combined value of the deal to represent a profit on the government’s investment overall, despite what appears to be a crystallised loss now.

Previous offers

While this is undoubtedly true, whether or not this deal represents the best value for money is another question.

This is not the first time that Virgin Money has made a bid for the Northern Rock business, the first time being before the bank was nationalised and worth considerably more overall.

Virgin confirmed its initial approach for the business in October 2007, when the bank first ran into trouble as the credit crunch was gathering pace, when it made an offer for the business alongside a consortium that included AIG Financial Products Corp, which is part of AIG, and investment firms WL Ross & Co, Toscafund Asset Management LLP, and First Eastern Investment Group.

At the time the deal, which would have similarly seen Northern Rock merged with the Virgin Money brand, was said to be worth a total of £20bn, though much of this would have been additional liquidity for the stricken lender.

While it is difficult to tell how much of this would have been pure purchase price, it is entirely likely that it would have been more than the price the combined entities will fetch now based on the current deal’s value.