There are always two extremes. One extreme says that Northern Rock should be bust by now. If it was a business operating in any other sector, or indeed if it was a business operating in any other region, it would be in administration by now. The other school of thought says that the government has an obligation to shareholders.
Of course normally, when a business struggles for survival, the government seems to care little for its shareholders. But this time it’s different.
Cast your mind back to October 1 1997 (I was still at school - ed!). That was the day that a building society with a loyal following in the North East became a bank. And with that, the building society’s borrowers and depositors found themselves with 500 shares, and those who were both (that’s depositor and borrower) had 1,000 shares. After day one, these shares were trading at 463p.
Now clearly, many of the 800,000 or so newly-formed shareholders went out and sold, but many stayed loyal. Investing is, after all, a long-term game, they were told. They thanked the government for their luck, and Labour MPs in the North East consistencies, where many of these shareholders lived, looked forward to many more years in parliament.
The workers were pleased too. Northern Rock is an important employer in the region and no doubt staff were delighted to see their employer so strong.
Today, it is all so different. The bank is, at it were, on the rocks. Sir Richard Branson’s offer might have the approval of the board, it might have the government celebrating the “get out of jail free card” Sir Richard has offered, and the deal might also represent a reasonable safeguard for jobs in the region, but shareholders are none too happy.
The Virgin supremo is planning a 1.3bn investment into the bank. The government likes it because the deal involves saving 6,000 jobs, and guarantees the repayment of £25bn of the Bank of England’s emergency loans over three years.
But some shareholders are spitting feathers. RAB Capital, the second-largest shareholder in Northern Rock, has said it is against the deal.
The trouble for shareholders is twofold. For one thing, the Branson deal represents a big fall in the valuation of the company: valuing the company at just £200 million, 40 per cent less than the company’s value at the start of the trading day, and less than a twentieth of the value in January.
Secondly, existing shareholders are going to be asked to stump up half the cash. In fact, Sir Richard is planning a rights issue. 6.2 new shares will be issued for every existing share. Reuters has calculated that means shareholders who acquired their stock as customers of the bank when it was floated and who still hold their 500 shares will be required to put up £770 each.
It’s no wonder, then, that shareholders are up in arms. But, what’s the alternative? At least the Branson deal still means existing shareholders get to keep around 45 per cent of the business.
If shareholders really believe in the company, and think the current share price grossly undervalues the business, then the Virgin deal provides them with the opportunity to see a return in the longer-term.
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