Luqman Arnold, Northern Rock’s would-be saviour, isn’t afraid of grand
gestures. During his previous brush with British banking, when he was
parachuted in as chief executive to sort out Abbey, he came up with a plan
to “turn banking on its head”.
Concerned that the world might not appreciate the full boldness of his vision,
Arnold had a replica of an Abbey branch built – upside down – in an empty
building close to the company's London head office.
Startled analysts and journalists were shown round the topsy-turvy creation –
and lectured on how serious Arnold was about changing the face of banking by
ending decades of poor customer service.
This time round, Arnold might do well to keep his big ideas to himself. Last
week his investment group, Olivant, tried to seize the initiative in the
battle for Northern Rock, the stricken mortgage lender whose woes have
proved serious enough to create a political nightmare for Gordon Brown and
chancellor Alistair Darling, and left taxpayers hugely exposed after
Northern Rock was forced to borrow £25 billion from the Bank of England.
Upside-down Arnold could be the answer to the government’s prayers. While a
consor-tium led by Sir Richard Branson’s Virgin Group is the Rock’s
preferred bidder, Olivant has – crucially – secured the backing of leading
Northern Rock shareholders.
Olivant is also indicating that it could pay back more of the Treasury’s money
early – £15 billion against the £11 billion from Virgin. And Arnold, whose
plans were first revealed by The Sunday Times, is also dangling the
incentive that the Treasury could benefit through a share stake if he can
nurse the ailing bank back to health.
It is a high-stakes game and a fast-moving one – Arnold is hoping that he can
win the day and take control within a week.
Much of Arnold’s career has been in investment banking.
Born in Calcutta in 1950, to an English father in the Indian civil service and
an Indian mother, he went to a leading English public school, Oundle, and
the University of London.
He has spent most of his working life abroad in Paris, Dallas, Singapore, Hong
Kong and Zurich. In 1996 he joined the Swiss banking giant UBS, rising to
become the first non-German-speaking president, but was ousted after a
board-room battle with veteran chairman Marcel Ospel in 2001.
Though Arnold has been described as an outsider, former colleagues said he is
“charming” and “cerebral” – a top-notch investment banker prepared to take
tough decisions and a strategic thinker.
But Arnold, whose Thai wife runs a successful chain of restaurants in London,
is also idiosyncratic. At Abbey he cleared his office of virtually all
furniture, insisting on working standing up at his computer on a
higher-than-usual desk – a habit which apparently allowed him more space to
think.
A more bizarre quirk was his demand that he should never stay in a hotel room
which had adjoining rooms – something that baffled staff at the bank.
He is also known for his creative leanings – he loves opera, is passionately
interested in architecture and is chairman of the Design Museum.
ARNOLD is certainly being creative in his bid for control of Northern Rock.
Unlike Virgin and JC Flowers, which last week walked away from the auction, he
is not proposing to buy up the bank. Instead, Olivant aims to inject up to
£800m into Northern Rock through a £650m rights issue from investors and by
investing £150m itself, giving it a stake of about 15%.
Crucially, the rights issue would be at Northern Rock’s market price – 110p on
Friday – rather than at the deep discount of 25p per share proposed by
Virgin, giving it 54% of the shares.
Under Olivant’s plan, the Treasury would also have a chance to benefit from a
revived Northern Rock through gifted warrants – in effect an option to buy
5% of the shares at a price thought to be more than 100p per share.
Since Olivant’s offer is not a takeover of Northern Rock, Arnold and his team
could take control within days. Leading investors, including hedge funds SRM
and RAB Capital, with 23% of the shares, have already agreed to invest up to
£440m in the rights issue. The two largest small shareholder groups have
also come out in support.
Two weeks ago, Olivant looked out of the running: Virgin had gained preferred
bidder status and Arnold’s plans were seen as at best vague.
Now he has muscled his way back in with a detailed proposal running to around
100 pages, outlining business plans and financing details.
Virgin may still be clinging to preferred-bidder status, but it is under
pressure. This weekend Virgin is looking at ways to revise its bid. One
option would be to increase the value of the discounted rights issue from
the 25p to more than 50p.
“The issue for shareholders is how much of this company they get to keep – the
Olivant proposal is far more attractive,” said James Hutson, analyst at
Keefe, Bruyette & Woods.
But in this tortuous saga, nothing is that simple. The response of the bank’s
board to Olivant has been lukewarm.
Olivant is thought to have become frustrated with what it believes is delaying
tactics and an obsession with detail by the Northern Rock board.
Many bankers say there are a host of issues to be thrashed out – from
management credibility, business plans and the huge task of arranging
financing for Northern Rock.
Arnold’s track record in building a retail bank is arguably unproven. His
vision to turn banking on its head included refocusing Abbey on its core
retail banking and personal-finance businesses.
A £26m rebranding created a logo that was lambasted as more suitable for a
nursery school and seen as a failure.
To be fair, Arnold did not have time to achieve his dream as Abbey was sold to
Spain’s Santander for £8.2 billion in late 2004. Even so, Olivant’s
management team are far more credible than Virgin’s, which is led by
Jayne-Anne Gadhia, who has never run a public company.
Where Virgin has an advantage is consumer confidence and its brand – factors
believed to have helped to slow the £200m a day that was being withdrawn by
savers. Many argue the Northern Rock brand, which Olivant would keep, is
irreparably damaged and could compromise a revival.
Virgin is also injecting more money – £1.3 billion, including the £650m rights
issue.
And there are other thorny issues, such as business plans.
Darling is determined that Northern Rock should never get into financial
straits again. The perceived strength of the business models will be a major
factor in how fast the Bank’s loans can be repaid.
What is clear is that Northern Rock will shrink and cannot return to the
disastrous model of relying on capital markets for 75% of its funding. EVEN
if the bidders can leap these hurdles, it is not certain they could raise
the huge sums to repay the Bank.
Last week, Arnold said he was “totally confident”, but Virgin is said to have
become less sure it can raise the £11 billion it wants.
Royal Bank of Scotland, Deutsche Bank, Citi and two other banks have been
lined up to provide funds. However, none will commit until it is clear a bid
has the backing of the government, would not fall foul of European rules on
state aid and has shareholder support.
That creates a problem for Darling. His options have boiled down to a choice
between two proposals where finance is not rock-solid, and nationalisation.
Though a private-sector deal is the favoured route, the government admits “all
options are on the table”.
Olivant and Virgin may be vying to be the bank’s saviour, but as it gets
weaker by the day, there’s a fair chance neither will get to be heroes.
THE HEDGE-FUND KEYSER
IN the already opaque world of hedge funds, Jon Wood of SRM enjoys special
status, writes Louise Armitstead.
His nickname is Keyser Söze, after the underworld kingpin in Hollywood’s The
Usual Suspects, whose ruthlessness and influence are almost mythical. It’s a
comparison Wood, 46, likes so much he uses it himself.
He shuns personal publicity yet is clearly bellicose.
As well as standing firm against the Bank of England, the Treasury and the
City watchdogs on Northern Rock, he fought a highly charged case against Sir
Tom Hunter over the sale of the Gadget Shop.
He is also a passionate kickboxer who trains several times a week.
Former colleagues say he’s bright, brash and ambitious.
He told one friend: ‘The thing I love about the City is that it doesn’t matter
if no-one likes you.
“The stock market is your proof of success and each day you can win or lose
and it’s got nothing to do with anyone else.’
Yet to the close circle around him Wood is very different from the usual
hard-nosed corporate raider.
Although of Yorkshire stock, Wood, the middle of three brothers, was brought
up in Whitstable, Kent.
Profoundly dyslexic, at school he struggled except at sport and maths,
although he “scraped” a 2:2 in economics from Loughborough University.
His fascination with the City started early. He told friends he was drawn by
the idea of being his own boss and gaining influence and wealth without
being a film star.
After jobs with Durlacher and Kleinwort Benson, Wood moved to UBS, starting
the Strategic Risk Management (SRM) division – it swiftly became the
bank’s biggest revenue generator. and Wood one of its most important
employees. He was given a free rein to do as he pleased, including moving
his team to work out of Monaco.
After 16 years, SRM spun off from UBS last year.
Wood said his mission statement is the same: to fight for the protection of
minority shareholder rights.
