Northern Rock Has Takeover Discussions After Bailout

Sept. 25 (Bloomberg) -- Northern Rock Plc, the U.K. mortgage lender that sought emergency funding less than two weeks ago, said it is in takeover discussions.

Northern Rock said in a statement today it has received several approaches. The talks are at a ``preliminary'' stage and no price has been proposed, the Newcastle-based company said. It abandoned plans to pay a first-half dividend next month.

The stock has fallen 74 percent in London since the announcement of a bailout by the Bank of England on Sept. 14 prompted customers to withdraw at least 2 billion pounds ($4 billion) in three days. Chief Executive Officer Adam Applegarth said the independence of the bank is under threat after rising financing costs hampered its ability to make new loans.

``The challenge for an acquirer is the cost of funding the short-term debt,'' said Mike Trippitt, an analyst at Oriel Securities Ltd. in London who has an ``add'' rating on the stock. ``They have to think about the financing that is rolling off and financing the existing mortgage book.''

Merrill Lynch & Co. is advising the board of Northern Rock on its options. The U.K. government hired Goldman Sachs Group Inc. to advise it on the future of Northern Rock as the possibility of a sale becomes less likely, the Daily Telegraph reported earlier today.

Northern Rock shares fell 5.2 percent today to 163.1 pence, valuing the company at 687 million pounds.

Dividend Scrapped

Former Goldman banker Chris Flowers may join the Cerberus Capital Management LP and Citadel Investment Group LLC hedge funds in splitting up Northern Rock, the Sunday Telegraph reported Sept. 23, citing an unidentified person familiar with the proposal. Lloyds TSB Group Plc may be working with UBS AG on a possible bid for at least part of the bank, the Daily Telegraph said Sept. 19, without saying where it got the information.

Northern Rock said today ``it would not be appropriate to make any interim dividend payment'' until the bank can announce the outcome of takeover talks and any changes to the business model. The bank said in July it would make the 14.2 pence a share dividend payment on Oct. 26 and repeated the pledge on Sept. 14.

Northern Rock bowed to pressure from the Financial Services Authority and the Treasury to scrap the payment, the British Broadcasting Corp. reported earlier without saying where it got the information.

The U.K. Shareholders' Association Ltd., which has 2,000 members, said today it will fight any plans to sell the company. The organization is seeking a meeting with Northern Rock's chairman and investor-relations director.

`Fire Sale'

``We would like to stop the company from being sold on the cheap in a fire sale, which is what seems to be happening,'' said Roger Lawson, communications director of the association and owner of Northern Rock shares. ``It could rebuild its business given time and reasonable funding.''

Will Hutton, director of the U.K. Work Foundation, said today that authorities should act to ensure a market for assets such as the debt tied to U.S. subprime mortgages that sparked the increase in credit costs in the past two months.

For Northern Rock, ``the situation is very dangerous at the moment,'' Hutton said in an interview at the Labour Party conference in Bournemouth, England. ``It's an open question whether the company should be put into administration.''