FOR Adam Applegarth, the embattled chief executive of Northern Rock, the
relentless pressure finally took its toll. More than two months after the
bank had been plunged into financial crisis, he cracked.
On Thursday evening, a “heartbroken” Applegarth contacted Bryan Sanderson, the
Northern Rock chairman, to tell him he had decided to resign.
Applegarth said this weekend his decision was linked to the first phase of the
bank’s restructuring – the submission of bid proposals that started to roll
in last Friday.
“Since the middle of August it’s been seven days a week, 20 hours a day,
entirely focused on getting the company in shape and looking after
stakeholders,” said Applegarth. “I guess I’ll get to the end of my watch
here and breathe a huge sigh.”
However, the chief executive is believed to have become increasingly irritated
by the groups of reporters camped outside the gates of his Northumber-land
estate. In the past week, the cricket-loving 46-year-old’s annoyance at
being hounded by the media reached its peak.
A series of stories lambasted him for selling £2.6m of shares at peak prices
and attacked his lifestyle, alleging he used the money to buy luxury cars,
including an Aston Martin for himself and a Ferrari for his wife.
Applegarth’s decision to quit will have been emotional. He has spent his
entire, 24-year working life at Northern Rock after joining from university.
He became chief executive in 2001 and set the bank the target of becoming
Britain’s third-largest lender, using the financial markets to fund
aggressive lending.
But in the past three months, Applegarth’s grand ambition has turned into a
nightmare. The liquidity freeze in the credit markets, which started in
August, plunged Northern Rock into crisis. On September 13, it emerged that
the bank had been forced to go to the Bank of England for emergency funding.
Insiders said that from this point Applegarth knew his days were numbered –
even though the Northern Rock board later rejected his offer to resign.
Sanderson, who was parachuted in as chairman to replace Matt Ridley on October
19, had planned to announce Applegarth’s departure only after the bank had
decided on a buyer or gained funds to allow it to remain independent.
In the end, Applegarth has fallen on his sword early – though he will stay to
see out the second stage of a strategic review due to be completed by the
end of January.
He was just the highest-profile casualty of Friday’s boardroom bloodbath. In a
sweeping shake-up, Sanderson ousted nonexecutive directors Sir Derek
Wanless, the former Nat-West chief executive, Nichola Pease, a high-profile
fund manager, Adam Fenwick and Rosemary Radcliffe.
Within days of his arrival, Sanderson had made it clear that the four were
likely to be axed.
On Friday, from his London office in Brook Street, near Clar-idges Hotel,
Sanderson delivered the final blow, telephoning the four to tell them of
their fate.
“We are having to move at great speed and there is not time for as much
delicacy as you would want. We need a fresh team to take us through the next
phase,” said Sanderson.
The boardroom shake-out comes at a pivotal point for Northern Rock. Though
attempts to engineer a swift sale have failed, bidders have now been flushed
out.
On Friday, a consortium led by Sir Richard Branson’s Virgin Group submitted a
proposal to take control of the bank.
Olivant, the investment firm led by former Abbey National chief executive
Luqman Arnold, has also made a proposal to turn around Northern Rock in its
current form by injecting new management and taking a minority stake by
buying new shares.
JC Flowers, the private-equity firm, is expected to make a bid while Northern
Rock expects a further three to five offers to emerge in the next few days.
One high-street bank is interested in snapping up Northern Rock’s branch
network, while a number are considering a bid for the bank’s efficient
administration and information-technology systems.
But despite the proposals, most informed observers believe the auction will
grind on for months. “I would be amazed if there is anything like a solution
before Christmas or even a month later,” said one banker.
In the past two weeks, some observers have claimed the auction was in danger
of turning into a shambles.
The political heat has also been turned up, after it emerged that some
potential bidders for Northern Rock could ask for an estimated £2 billion
interest bill to be waived as part of any deal. Such a move poses the threat
that the cost of saving Northern Rock could fall to the taxpayer.
With the government now on the hook for more than £23 billion that Northern
Rock has borrowed from the Bank, chancellor Alistair Darling finds himself
under intense pressure.
What seems certain is that the government is likely to be a major creditor
well beyond February – the date set by Darling to review the loan facility.
Any bidder for the whole bank is almost certain to demand that the Bank
extends some sort of support of Northern Rock.
So far, this has been at a punitive rate of between 6.75% and 7%. The big
issue is whether this rate will be cut and how long the Treasury will be
prepared to provide funds. However, Virgin and Arnold have both claimed they
can promptly repay a significant portion of the Bank’s loans.
Last week, the Treasury and potential bidders appeared to be playing a complex
game of cat-and-mouse.
Before tabling firm takeover proposals, a number of bidders have demanded more
clarity from the Treasury on the level of financial support it would offer.
These bidders are thought to include JC Flowers, Cerberus, the American
hedge fund, and the Virgin consortium.
However, the Treasury wants to see the bid plans before starting negotiations
on any financial arrangements.
Darling’s reputation as the Labour government’s crisis fixer will be on the
line this week when he reveals the “principles” that will guide the
Treasury’s approach to assessing bids for Northern Rock.
Darling is expected to say that the ultimate decision on Northern Rock’s sale
rests with the bank’s board, but he will also stress that the interests of
taxpayers must be protected. The Treasury is also prepared for a
private-equity takeover of Northern Rock, while a break-up could also be
considered.
One major Treasury concern is to ensure that any buyer does not get too juicy
a deal.
The big fear is that Northern Rock could be turned around swiftly, delivering
massive profits to its new owners – a result that would be seen as a
political disaster.
“You could be cynical and say that the solution for the government is anything
that gets Northern Rock off the front pages, protects the taxpayer and stops
this becoming a political fiasco,” said one senior banker.
Potential bidders are understood to have become increasingly frustrated about
the auction. One criticism is that it is unclear who is in charge and
whether Northern Rock’s board has had the power to judge what is the best
bid.
Some believe Sanderson’s brutal boardroom shake-up was meant to be a clear
signal that the bank and its three investment banking advisers –
Black-stone, Merrill Lynch and Citi – are running the show.
The pressure on Darling for further clarification of the Treasury’s position
mounted last week after a sales memorandum sent to about 50 potential
suitors was leaked to the press.
The memorandum, called Project Wing, suggests three options, including an
outright sale of the whole bank or two plans to sell off parts of Northern
Rock.
One plan includes a sale of the bank’s administration platform and 76 branches
and possibly the £13.5 billion in remaining savings deposits. A second
involves the sale of the bank’s infrastructure plus securitised mortgages,
leaving a rump of loans and assets. Under both of the carve-up plans, the
rump of the business would remain as a listed company.
The memo also makes some broad assumptions. By January, Northern Rock is
expected to be borrowing £24 billion from the Bank, though by 2010 this will
fall to £6 billion.
While profits are expected to plunge to £143m in 2008 from Northern Rock’s
forecast £500m this year, the document forecasts a rapid recovery to £643m
in 2010. However, these forecasts are understood to be based on the
government being prepared to slash the current punitive rate charged by the
Bank.
The big problem is that none of these financial conditions has been signed off
by the Treasury.
Another looming problem is state aid. Under European Commission rules on state
aid, governments can provide “rescue aid” for up to six months. The rules
also allow longer-term financing in the form of restructuring aid.
However, the commission only approves this if there is clear evidence that the
company can be restructured into a viable business with no need for further
financing from government.
Even then, there are difficulties, since the commission can impose conditions
and can even force loans to be immediately repaid.
So far, the European Commission has said only that it is in close contact with
the British government.
But Brussels insiders said competition commissioner Neelie Kroes has made it
clear that the British government will not be allowed to “ride roughshod”
over rules on state aid.
“The position on funding is serious, but not insurmountable,” said one insider.
In theory, the government does not need to act until March 13, when the
six-month rescue aid period ends.
However, time is running out.
According to Brussels sources, the Treasury has yet to apply for any approval.
Given that commission approval can take two months, the British government
is under pressure to act.
The fate of Northern Rock has been thrust back into the political spotlight
after Darling wrote to Vincent Cable, the acting Liberal Democrat leader,
last week.
In the letter, the chancellor said his key objective was “minimising the cost
to the public purse” – the first public admission that the taxpayer could
lose money. Previously, Darling had insisted that his aim was to “protect
taxpayers”.
The bidding battle looks finely balanced. JC Flowers, which has lined up £15
billion in finance from a series of banks, is a strong contender and is
thought to be ready to mount a full offer within a month.
Under its plan, Northern Rock would be taken private and stabi-lised inside 18
months and floated within two to three years.
However, JC Flowers is likely to set a tight deadline for its offer to be
accepted since it is concerned that it will be used a stalking horse to
entice rivals into a competitive auction.
Branson’s consortium has considerable firepower through the backing of AIG,
the world’s biggest insurer, and billionaire investor Wilbur Ross. Arnold’s
plan appears to be gaining the backing of shareholders given the difficulty
of selling Northern Rock at a good price in the current turmoil Even so, the
chancellor faces a huge challenge to find a solution. The hard negotiating
has barely started.
- Virgin founder Sir Richard Branson wants to roll Northern Rock into
Virgin Money, his credit-card arm. The billionaire has backing from AIG, the
world’s largest insurer and the hedge fund Tosca, whose chairman is Sir
George Mathewson.
- The private-equity firm JC Flowers, led by Christopher Flowers, wants to
take Northern Rock private. It has lined up £15 billion in funding and
recruited a top team, including former Alliance & Leicester boss Richard
Pym.
- The American private-equity house Cerberus is chaired by John Snow, a
former US treasury secretary. The group is interested in either a rescue
plan for Northern Rock or a break-up to buy its mortgage assets. It is
backed by GMAC.
- Luqman Arnold heads Olivant, an investment group. It is aiming to parachute
in a new management team led by Arnold, a former Abbey National chief
executive. It would keep Northern Rock as a listed firm and take a 10%-20%
stake.
