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The Globe and Mail

Where the money to buy Northern Rock really came from


Who is really buying Northern Rock? It sounds an odd question given all the hype about Virgin's ascent to the big league of high-street banking, writes Patrick Jenkins.

In fact, the real money comes not from Sir Richard Branson but from his friend Wilbur Ross, the U.S. financier. Although Mr Ross was hardly mentioned in most of the communications concerning Thursday's deal, his role is clear.

Although the breakdown of the £747-million ($1.214-billion) cash investment was not disclosed, according to three people familiar with the deal Mr. Ross contributed more than a third of the total, or nearly £260-million, five times more than Virgin Group.

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Mr. Ross's importance is also evident in the finer points of the way the deal was structured. The cash, debt and short-term performance-related top-up the government will receive in exchange for Northern Rock is potentially worth a combined £947-million.

But there is another tweak of up to £80-million to the value of the transaction that will be made if the enlarged Virgin Money is floated or sold on within five years.

Like any private equity investor, Mr. Ross needs an "exit" route, a way to ensure he can cash in. But given the political sensitivities for the government if it is seen to allow a private equity firm to make a quick killing to the detriment of taxpayers, an £80-million penalty is payable if there is a "quick flip" as early as next year, reducing to zero from 2016.

"We felt it was only fair to share the gains with the UK government if there was a quick trade," Mr. Ross told the Financial Times, adding he did not plan to sell out until the business, at present valued at 90 per cent of the book value of its assets, was worth 150 per cent, which could take at least three years.

"The government got a very full and fair price," said Mr Ross. "From our point of view, this is a vote of confidence in the U.K. financial system and in the way the government is approaching banking."

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