NAO report reveals how Branson ‘Glazered’ taxpayer on Northern Rock

A National Audit Office report has revealed the taxpayer may never see payment for the Northern Rock sale to Virgin.

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Not only is there little chance of taxpayers seeing payment from the sale of Northern Rock to Virgin, they may also incur further costs, a National Audit Office (NAO) report reveals.

Northern-Rock-house-repossessionThe details in the report confirm every criticism Left Foot Forward laid down at the time of the deal, which took place on January 1st this year.

The Tories’ insistence to rush this deal has resulted in a real ‘botched privatisation’.

Regarding the £150m hole in the sale proceeds in the form of a bond with a coupon, the NAO confirms our fears that the taxpayer may never receive a payment: the lower bound on the NAO valuation of interest is zero (we kid you not!).

Secondly, they ambitiously put a lower bound on the £150 million that the bond represents at just £50 million (that’s hopeful if the payments are zero!).

Left Foot Forward reported last November that Osborne planned to cover this £150m hole with capital notes:

Capital notes are essentially a form of loan that puts the lender in a riskier position, than if they were, let’s say, to lend the money directly to Virgin Consortium.

“The government has had to engage in this ‘vendor financing’ – a trick pulled by the Glazers when they bought Manchester United – because Virgin clearly can’t find a private investor to back the deal.”

Most worrying is the information on the £250 million asset strip of Northern Rock’s own money Virgin used to pay the government.


See also:

Exposed: Richard Branson the cuddly union-buster 20 Dec 2011

The £150 million hole in Osborne’s Virgin/Northern Rock deal 22 Nov 2011

NAO report reveals how Branson “Glazered” taxpayer on Northern Rock 18 May 2012

How we were all Glazered by Virgin’s purchase of Northern Rock 24 Nov 2011

Re-mutualising Northern Rock “would be a good move” 1 Feb 2012


Here’s how Richard Branson did it:

“Short-term debt finance of £253 million provided by two banks and repaid using cash extracted from Northern Rock plc.”

This cash was extracted in the following way:

“By transferring one of its subsidiary companies to Northern Rock plc, Virgin Money was able to free-up cash to repay the short-term debt finance. This internal transfer of assets swapped £253 million of cash in Northern Rock plc for £330 million of shares in the subsidiary.

“The balance of £77 million due from Northern Rock plc could then be used to fund the payment to the Treasury of the deferred elements of the agreed sale price.”

Shuffling the deck! Gosh that Branson is a smart chap! The question we asked was why couldn’t the Treasury have done this?

This was the NAO white-wash answer:

“As a stand-alone business, Northern Rock plc was not profitable and the Treasury could not extract any capital in the form of cash before a sale. Combining Northern Rock plc with Virgin Money’s profitable operations enabled cash to be released after the sale.”

Furthermore, according to the NAO it did not cost the Taxpayer anything because:

“It is not possible to separate the value paid by Virgin Money for this cash from the price paid for the business as a whole.”

How did they work that out?

“Virgin Money told us that it paid full value for the cash released from Northern Rock plc which it used to part-fund the purchase.”

We would rather not take Branson’s word for it, because there is plenty of evidence in the NAO report showing the Treasury could have taken out Northern Rock’s excess capital itself.

For example, the competing bid was from NBNK Investments who thought the Treasury were able to extract money, and was helpfully telling the Treasury how much the taxpayer should extract. (We estimated the excess capital at around £600 million and the Treasury should have extracted it all, no matter how nicely NBNK suggested a number!).

This is how the NAO described the competing NBNK final bid:

“The NBNK bid was valued by UKFI at £829 million to £846 million. The valuation included an assumption by NBNK that the Treasury could extract £142 million to £159 million from Northern Rock plc before any sale. Such an extraction of capital would have required FSA approval.”

And what would the FSA have said? Well in Appendix 3.18 we see why they agreed in relation to Virgin’s asset strip:

” The FSA decided that less capital was required than had been the case for Northern Rock plc on a stand-alone basis.”

So that was a low hurdle to clear.

So the asset strip of the excess capital by the Treasury is still an open question. Despite Branson being able to do it, and NBNK believing the Treasury could do it, is it still credible to believe that the Treasury could not have done it?

And there is a cost to the taxpayer. We thought the cost of this botched privatisation would be to reduce the price of book valuation to 0.66.

And hidden in the back of the report the NAO agrees; point 3.20 notes the cost to the tax payer:

If full value is ascribed to the cash freed-up, the adjusted multiple of book value paid for Northern Rock plc’s other assets falls slightly from 0.76-0.86 to 0.66-0.80.” (The top of the range assumes the bond pays more than the NAO expects!).

But being right is no comfort when you see some guys pay the taxpayer just £700-odd million to trouser a £500 million pristine bank with a gift of £600 million of excess capital.


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