Bidding war for Northern Rock set to generate £1.5bn price tag

Sell-off first move in coalition plan to withdraw from banks bailed out during financial crisis

Northern Rock is expected to be sold for around £1.5bn next year as the government takes its first step towards extricating itself from the banks it rescued during the financial meltdown of 2008.

The sale will spark a bidding war between potential buyers, including Richard Branson's Virgin Money, Tesco and JC Flowers, the private equity group.

But a "populist" stock market flotation to lure private investors has not been ruled out either. Disposals of government stakes in Lloyds Banking Group and Royal Bank of Scotland are planned for 2012-14 in a series of privatisations that ministers hope will create a "feelgood" factor ahead of the next general election.

UK Financial Investments, which looks after the taxpayer stakes in bailed-out banks, will shortly conduct a "beauty parade" to appoint an investment bank to advise on the best way to maximise returns from the Rock.

City sources believe a deal could be done in the first half of 2011, although cautioned it is by no means certain that such a timetable could be achieved and will depend on the appetite of potential bidders and market conditions. The investment bank appointed will have to consider how to best generate profits for the taxpayer through a sale, flotation or other opportunities that may arise.

Politicians and lobby groups keen for a remutualisation of Northern Rock to return it to the building society sector it left in 1997 are likely to be disappointed.

The final decision about selling Northern Rock will rest with George Osborne, as UKFI's responsibility is to advise the Treasury on the options available.

A decision to begin the process of looking for ways to remove the taxpayer from 100% ownership of the Newcastle-based lender early in the new year means hopes harboured by former chief executive Gary Hoffman to launch a bid are likely to be dashed.

Hoffman stunned UKFI and ministers by resigning last month to join the acquisition-hungry investment vehicle NBNK, which is thought to be interested in the Rock and the 600 branches that Lloyds Banking Group must sell off to appease the EU. As a condition of hiring Hoffman, NBNK was banned from bidding for the lender for 12 months.

Hoffman's departure forced chairman Ron Sandler to take responsibility for the day-to-day control of the Rock, which has been split in two since it was first nationalised in February 2008.

The business being readied for sale is Northern Rock plc – the so-called "good bank", which has been stripped of the taxpayer loan and is funded by retail deposits. It made a loss of £142m in the first half of 2010. The "bad bank", containing troubled loans and a government loan of £22bn, has been united with Bradford & Bingley's mortgages to create a holding company known as UK Asset Resolution (UKAR). This might eventually be sold.

A spokesman for UKFI would not comment on whether a sales process was likely to begin, but said: "UKFI is committed to developing and executing a strategy for disposing of the government's investment in Northern Rock plc. However, there is no presumption at this stage on the timetable or process."


Jill Treanor and Richard Wachman

The GuardianTramp

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