Last Chance for Northern Rock Shareholders?


Activist Northern Rock shareholders rallied for support ahead of the bank's extraordinary general meeting Tuesday in the hope of retrieving firesale returns from a private-sector takeover.

But the prospect of nationalization still loomed large for the heavily indebted mortgage lender, analysts told

"I think it's looking increasingly likely (that Northern Rock will be nationalized), but I think it will be a stepping stone," Corinne Cunningham, head of financial research from Royal Bank of Scotland said Monday.

Investors SRM Global Master Fund Limited Partnership and RAB Special Situations Master Fund Limited have proposed four resolutions for Tuesday's meeting which would force the bank to seek further shareholder approval before it could embark on a number of actions, including issuing small amounts of new shares in the company, selling more than 5 percent of its assets over a 12-month period, or making acquisitions equal to 20 percent or more of the group's assets over the same time frame.

SRM and RAB combined own about 18 percent of the company.

Northern Rock said in an open letter on its Web site that shareholders should vote against the resolutions, which would "materially restrict the power of the Board to act at a time when prompt, decisive action may be required to deliver an optimum solution for shareholders and other stakeholders (including creditors)," and that the resolutions would "hinder the Board’s ability to negotiate and implement swiftly transactions that preserve liquidity and that may be key to a successful outcome of its strategic review."

No Return for Nationalization?

If the shareholder action is successful in keeping the final say in decision making it could translate to a cash value for their dwindling shares, but if the bank is ultimately nationalized, the move will have been futile.

Northern Rock insisted it was still looking at a private sector solution Monday, but many analysts think the money markets will prove too restrictive for the two interested consortia to raise sufficient capital.

Both the Virgin Group, led by British entrepreneur Richard Branson, and investment company Olivant, headed by former Abbey National boss Luqman Arnold, have made bids for the mortgage lender.

But "a large domestic group could yet step in to buy the bank very cheaply," Nigel Myer from Dresdner Kleinwort said in a research note Monday.

Still, there seems little incentive for this at the moment, Myer added.

Nationalization would be a blow to shareholders as well as the bidders, as it could see the existing shares canceled with little or no cash compensation. But interested parties would still have the option of bidding for assets that could be stripped from the damaged bank.

In anticipation of the nationalization, the British government has lined up Ron Sandler -- who rescued Lloyd's of London from a near collapse -- to run the bank in that event.

But if the bank was taken into public ownership it is unlikely to remain under government control for long, according to RBS' Cunningham.

"Nationalization won't be the end game," she said. The "UK government is not looking to own and operate a UK bank in the long term."

Northern Rock’s decision to sell off 2.2 billion pounds ($4.4 billion) of its mortgage assets to U.S. investment bank JP Morgan and tinkering with its pensions last week suggest the bank sees an end to its recent saga sooner rather than later.

"We suspect some sort of announcement is likely in coming days," Myer said.

The bank has been in financial limbo since it borrowed about 26 billion pounds ($51 billion) from the Bank of England in a highly publicized emergency draw in September, caused by a severe lack of liquidity in the money markets.

Shares of Northern Rock were lower by 15.2 percent Tuesday and are less then a tenth of their value at the beginning of 2007.

-- AFX and Reuters contributed to this report