Shares in Northern Rock climbed almost 14% on Wednesday after the bank said it was in talks with suitors, but analysts said the future for shareholders remained unclear amid growing pressure for a quick solution.
Under pressure from the U.K. Treasury and regulators about the use of emergency funds from the Bank of England, the lender said late on Tuesday it had scrapped its interim dividend, but also said it had received a number of approaches from unnamed parties regarding options including an offer for the group.
It said there was no certainty as to the outcome, adding the preliminary offer discussions had not touched on a price tag.
"They have confirmed they are in talks, but it's very tentative," analyst Alex Potter at Collins Stewart said on Wednesday. "If you haven't even come to discussions on price, you are a long way from completion."
Political and regulatory pressure has increased on all parties involved to stem losses at the bank and curb its destabilizing effect on the rest of the mortgage sector.
Analysts say this could prove critical for shareholders, who have already seen the bank lose more than 70% of its value in nine trading days and are now unlikely to see anyone pay a premium to the current share price.
"We believe that the motives of other parties involved in Northern Rock are focused more on avoiding costs to taxpayers and protecting system stability," Bear Stearns analyst Robert Sage said in a note. "It may be that the desire to bring the debacle to an end could be at the expense of the ultimate risk-takers, the equity holders."
One group of small shareholders has already formed under the U.K. Shareholders Association and says it will oppose a firesale.
What Next?
Analysts say current options include an independent Northern Rock under a scaled-down model, a takeover by a rival, a takeover by a private equity player, and, finally, a "run-off" solution -- effectively closing and winding down the business.
A takeover or a run-off are currently seen as the most likely -- assuming a price can be agreed -- and analysts said on Wednesday even a private equity deal, after weekend speculation three leading hedge funds were planning a raid, was possible.
Private equity deals with banks are rare, however, and past examples -- LTCB in Japan and KEB in Korea -- have been done under very different circumstances.
Few analysts, though, have hazarded a guess at the value a possible deal could entail for shareholders.
"In a sense the current share price is irrelevant – it represents what someone might pay rather than reflecting the value of the business as an entity," one industry analyst said.
Northern Rock shares were up 12.8% at 184 pence, valuing the bank at 775 million pounds.
The cost of insuring Northern Rock's debt against default fell, with five-year senior credit default swaps dropping 40 basis points to 140 bps -- meaning it costs 140,000 euros a year to insure 10 million of the bank's debt against default. Traders said the move was exacerbated by technical factors.
Wednesday's share jump boosted other top mortgage lenders hit in the recent sell-off, with the sector also helped by news no banks took up the Bank of England's offer of a 3-month loan at punitive rates -- seen as reassuring.
Alliance & Leicester, the second worst performing bank in the year-to-date after Northern Rock, was up 4.2% while Bradford & Bingley was up 5.6%. HBOS was up 5.2%.