Northern Rock: Takeunder Candidate

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Lex says that Christopher Flowers doesn't seem to have sustained much reputational damage in the UK from the fact that he's desperately trying to unbuy Sallie Mae. Certainly there don't seem to be too many obstacles in his way should he go ahead with his bid for Northern Rock. But it's equally clear that unless and until such a bid emerges no one's counting any chickens.

For one thing, some lenders to Northern Rock have already formed a committee under the direction of Houlihan Lokey Howard & Zukey, restructuring specialists, "to protect their interests" given that they "face substantial losses" if Northern Rock is sold. That's surprising, given that Northern Rock still has a market cap of about $1.5 billion – presumably that's the amount of value left over in the bank once all its creditors have been paid off in full.

We're also told that Northern Rock is considering staying independent, relying on a £10 billion credit line from adviser Citigroup. It's far from obvious why that would be an attractive option if there really is, as rumored, serious interest in the bank not only from Flowers but also from the likes of Cerberus, Blackstone, and Apollo.

Northern Rock's management and a large number of its lenders, then, are clearly far from convinced that a real offer will emerge, even as speculators are bidding up its stock in hope that some private-equity shop or other will swoop in and give them a windfall. My guess? A takeunder, where Northern Rock agrees to sell itself at some discount to the secondary-market price. The private-equity shops know, along with management and shareholders, that this is a distressed asset, so I doubt much of a bidding war will emerge.