Virgin's rescue bid for Northern Rock could position it as a global player
Where most see turmoil, some see opportunity. And few are more opportunistic than Sir Richard Branson, the swashbuckling founder of everything from airlines to health clubs and—soon—an outfit offering space travel, all under the Virgin Group brand. So when a liquidity crisis sent British mortgage lender Northern Rock's share price plummeting, Branson was ready to come to the rescue—and add the bank to his growing roster of Virgin companies.
There's no deal yet, but Branson aims to fold Northern Rock's 76 branches and $200 billion in assets into an existing operation called Virgin Money. He has assembled a team of financial heavyweights such as insurer American International Group and investor Wilbur Ross, who together would inject up to $2 billion into the bank in exchange for a controlling interest. "The Northern Rock brand is broken...and it needs funding and liquidity, which Virgin and its partners can provide," says Jayne-Anne Gadhia, CEO of Virgin Money UK. Still, Gadhia concedes that Northern's mortgage-generating machine is efficient, and that the company's loan portfolio is better than the British average.
Can Branson's magic revive Northern Rock? So far, Virgin is far from a major player in finance, with just $6 billion in assets and an online-only operation. And Branson has overreached in the past, with relatively unsuccessful forays into soft drinks, cosmetics, clothing, and more. But Virgin Money is growing. Its British arm serves 2 million customers, offering savings accounts, loans, credit cards, and insurance, and it's getting high marks for its service. In recent years it has moved into Australia and South Africa. Says Ross: "Virgin Money is a very respected name."
Virgin is now coming to the U.S. In May, Virgin paid $50 million for a controlling interest in CircleLending, and on Oct. 15, changed its name to Virgin Money USA. The outfit administers $200 million in loans between family and friends, charging fees of $100 to $2,000 to collect and ensure repayment. Soon, Virgin hopes to offer mortgages, mutual funds, and other services requiring a partner with a banking license, and it's talking with U.S. banks about that.
The real action, though, could be in Britain. If Virgin snares Northern Rock, it will need to keep funding its $200 billion loan portfolio and pay off the $26 billion bailout Northern got from the Bank of England. Virgin says it can do that by wooing more online accounts to bolster Northern's deposit base and tapping its partners' deep pockets. Analysts are skeptical. "The proposal Virgin submitted fails to address the more pressing liquidity issues" Northern faces, says Keefe, Bruyette & Woods banking analyst James Hutson.
Once Virgin gets the operation back on its feet, it intends to ramp up offerings quickly. Gadhia plans to shift Northern's focus away from less profitable lending and to use Northern's branch network to promote Virgin credit cards, insurance, and mutual funds. And by continuing to expand internationally—Canada may be next—Virgin Money will be able to take smart ideas from one market and introduce them elsewhere. "What we do well," says Gordon McCallum, CEO of Virgin Management, which oversees the group's companies, "is design simple products and deliver them with great service."