LONDON — U.K. mortgage bank Northern Rock’s advisers are in talks with buyout firm JC Flowers over a rescue bid and U.S. firm Cerberus is also interested, sources familiar with the situation said on Wednesday.
News that at least two potential bidders remain interested gave Northern Rock’s battered shares a boost, lifting them over 14 per cent at one stage.
J.C. Flowers has secured more than £15-billion ($30.6-billion U.S.) in funding that could be used in a takeover, a source close to the matter said.
Flowers, founded by former Goldman Sachs banker Chris Flowers, was doing due diligence work — a process set to take “weeks” — and funding was contingent on that, the source said.
Cerberus, J.C. Flowers are among those assessing the Northern Rock business
Mr. Flowers did not aim to break up the mortgage lender, but he was keen to move quickly to prevent further damage to Northern Rock’s brand and business.
“The objective here is not break-up, more to keep the thing together and make it work,” the source said.
Cerberus also remains interested, another source close to the situation said.
Northern Rock, Britain’s fifth-largest mortgage lender, has been engulfed by a crisis since it was offered emergency funds by the Bank of England last month.
By 08:30 (GMT) Northern Rock shares were up 10.6 per cent at 150 pence — well above its record low of 112p on Tuesday but still down 87 per cent this year. The shares hit 154.9p in the session, valuing the bank at about £630-million.
“The business is almost certainly going to be taken out or split into parts, so ultimately the question is what price is it worth,” said James Hamilton, analyst at Numis.
“The best price for equity shareholders will arrive if there are multiple people interested in acquiring it. I suspect that as the general quality of the assets is pretty good there will be competing bids for various parts of the group, if not for all of it,” he added.
Northern Rock said it had appointed U.S. investment bank Citigroup to work alongside Merrill Lynch to advise it. It said it continued to consider a range of options, but declined to comment on specific details.
Several bidders have expressed an interest in Northern Rock since its troubles escalated last month, but most have since pulled out.
Speculation on the bank’s future has been rife for two weeks as regulatory and political pressure increases on all parties to find a swift solution to the debacle, stem losses and curb the destabilizing effect on the rest of the sector.
A trade sale of the bank in its current form is seen as increasingly unlikely, and analysts say they now expect Northern Rock to be wound down and possibly parcelled off to more than one buyer.
J.C. Flowers and Cerberus declined to comment.
Analysts said refinancing Northern Rock’s mortgage book remains the key issue for any buyer, with the bank’s funding running off at £1.5-billion to £2-billion a month and the book also running down as maturing products are not being re-marketed.
“We continue to struggle to see how J.C. Flowers creates value from such a transaction,” Royal Bank of Scotland analysts said in a note. “The key problem for any bidder remains the current cost of funding versus the pretty much locked in yield on the mortgage portfolio which creates a negative spread.”
Bondholders are watching the situation closely, and as many as 100 investors took part in a conference call on Tuesday organized by investment bank Houlihan Lokey, which is advising holders of Northern Rock’s tier-2 debt — a layer in the company’s capital structure.
The call was a first step towards forming a committee by Thursday, a source said. Tier-2 debt, which legally comes ahead of tier-1 to receive money in times of trouble, is worth about £2-billion.
News of a private equity bidder for Northern Rock pushed up the cost of insuring the bank’s debt against default.
Five-year credit swaps widened by 25 basis points to 210 basis points, meaning it costs €210,000 a year to insure €10-million of the bank’s debt against default.