Business Stripped Bare Page 23
2. Do a deal with a Citi or BOA [Bank of America] where they buy the company but we put in the brand so they get a Virgin-branded retail presence in the UK.
3. Talk to Northern Rock and the Bank of England direct. Richard could be used as frontman to make some sense of the crisis. Northern Rock could be rebranded Virgin and the Bank of England stand behind the current loan facility. We could withdraw from mortgages for the time being and focus on savings to rebalance the balance sheet – and with Richard fronting a saving campaign – Branson making sense of the current crisis – it's all now about increasing savings and reducing debts etc.
4. Whatever happens, I think we should do some research into who people would trust with financial services now. I bet the answer will be – Richard Branson.
On the one hand I know that this all sounds pretty batty, but on the other hand – discontinuities in the system make it right for change – and I think we could do something, if Richard was able to speak to Darling or Brown to ask how we can help.
What do you think? I've restrained myself from copying this to Richard until I got your views.
J-A.
Gordon's reply was his usual mix of caution and common sense. 'I think 1. is interesting and the rest is batty! Let's talk tomorrow morning.' Stephen was equally cautious.
Jayne-Anne decided to phone me directly. She asked me if I'd seen the queues outside Northern Rock's branches on the news.
I certainly had.
'Well? Do you think we should give it a go?'
'Screw it,' I said, 'let's go for it.'
You can only get into pole position by giving something a try. Over many years, Virgin's business aim has been to find a strong position in a game-changing market. We've done this in the record business, media, telecoms, health clubs and the airline industry and will soon do it in space travel. We put ourselves out there, searching for new opportunities. And we know that they are more likely to come our way if we get ahead of ourselves and prepare the ground first.
Next day Jayne-Anne talked through her 'batty' ideas with Peter Norris, one of our long-term advisers, and a man who had run Barings. Peter said straight away that Virgin should start to look at the idea seriously. By now Gordon and Stephen had got their breath back and were over the shock – it was time to think how best to assemble a team to take on this enormous task. Our Northern Rock adventure had begun.
The following day I phoned Matt Ridley, the chairman of Northern Rock. I told him we would love to see how we could help save the bank. Matt is a charming man. He appeared delighted to take the call: 'This is great news, Richard. The Virgin brand is just what the bank needs,' he said. 'Of course, you do realise you're going to need literally billions of pounds?'
'Ohh, yes,' I said. And I thought to myself: Billions? Did he really say billions?
'I'm confident that can be arranged,' I said. Well, of course he said billions. He was a bank.
'I fully understand,' I said, and by then, with sweat beading my brow, I really did.
The bank's position had become public at 8.30 p.m. on Thursday 13 September 2007, when the BBC reported that Northern Rock had asked for and been given emergency financial support from the Bank of England. The funding facility was finalised in the early hours and announced to the London Stock Exchange at 7 a.m. Within hours of opening, long queues began to form outside Northern Rock branches across the UK. The website collapsed and its phone lines were jammed. This was shocking news: the first run on a bank in the United Kingdom since Victorian times.
There was a great deal to admire in Northern Rock, and I wanted to protect and save what was good about it. When the run on the bank began I watched the television pictures of the queues along with everybody else. Now, the queues were undeniably disturbing, they were the story. But being in the businesses I'm in, it won't come as any surprise that I also had my eye on the front of those queues, where Northern Rock spokespeople were trying to reassure some very worried customers. I admired the way the staff turned out at the branches and dealt with people as they demanded their money back. They stood right in the front line, calmly advising customers. I heard from inside that everyone had come in to help – it was all hands to the pumps.
The bank had weaknesses: yes, they had got themselves and their customers into a whole heap of trouble by borrowing short in the money markets for long-term mortgages. But hindsight is easy: the bank had been popular with intermediaries – the financial advisers who recommended the bank's mortgages – and they had very modern systems in place. It was an engine that was fine in its way – but too hungry for the road it was on. It had run out of petrol. Our job was to see how it could be made to work again on a more environmentally benign fuel than the short-term money markets.
First of all, we needed to put together a winning team. While much of the media interest was to focus on me personally in the coming months, it won't surprise you to learn that I've neither the time nor the skills to run a bank. As far as the rescue team – a formidable group of people led by Jayne-Anne Gadhia, the head of Virgin Money – saw things I was very much in the background. Each evening I would ring Jayne-Anne for a catch-up, and to see if there was anything I could do.
Stephen Murphy appointed James Lupton of Greenhill to help us in London, along with Peter Norris's firm Quayle Munro, and Andrew Balheimer of top law firm Allen & Overy – we had the makings of our team. We needed to know how to deal with a company the size and scale of Northern Rock. 'Do you really think we can get this?' Their answer was that if we could secure the funding, then it was made for us. But only if we could get funding.
So I was given the task of drumming up support for our equity consortium. One of our team dubbed it 'dialling for dollars' – and certainly I was able to use some top-flight contacts to pull people on board. I also made a number of more personal calls to ensure there would be goodwill towards a private rescue bid – I was given the green light at the highest level.
We built up a business plan to explain how we would turn Northern Rock into the Virgin Bank. (I had toyed with the idea of calling it Virgin Rocks, doffing the cap to our rock-music origins; Jayne-Anne gently but firmly dissuaded me.) My first port of call was AIG, the insurance group who sponsor Manchester United Football Club. They were very keen to support us. It was a flying start. We went on a roadshow, presenting our plans to the big global banks. Our longstanding relationship with the Royal Bank of Scotland paid dividends – they requested that we deal with them, and their partners, Citigroup and Deutsche Bank, exclusively. This was a brilliant boost for us. We now had in place a possible investment of £11 billion (yes, billion!)
On Friday 12 October 2007, we unveiled our consortium of heavyweight financial backers. Our team included Wilbur Ross, the veteran distressed debt investor; AIG, the world's largest insurance company; First Eastern Investment, led by Victor Chu; and Toscafund, the hedge fund led by Martin Hughes and chaired by Sir George Mathewson. (Sir George, the former chief executive of the Royal Bank of Scotland, was very kindly acting as our senior adviser while we looked for a chairman.)
The Virgin team went to Freshfields, the London law firm, for an initial meeting with the Northern Rock management team, when Adam Applegarth, the beleaguered chief executive, was still in situ. Jayne-Anne told me later that she had been hugely impressed with the Northern Rock team's willingness to divulge information, and with their diligence in trying to sort out the mess. Following this meeting, Northern Rock opened their data room to the Virgin team.
But now there were other competitors eyeing up the bank. Investment firms Olivant, Cerberus, JC Flowers and Five Mile were all up against our plan. It appeared that this was going to be a competitive bid and, given the credit crunch, the battle for funding was likely to be fierce.
It was clear to us all that we needed a credible senior figure to pull the project together. So Jayne-Anne allotted me the task of persuading Sir Brian Pitman – the leading banker of his generation and a man of huge knowledge – to be
come our chairman.
I had worked with Sir Brian for years on the board of Virgin Atlantic and through our connection with Singapore Airlines. I like and admire him. At seventy-six, his brain is as sharp and focused as ever. He is on the board of Carphone Warehouse, and ITV, and is a senior adviser to Morgan Stanley. Stephen and Jayne-Anne had spoken and met with him several times as we refined our proposal. He was extremely reluctant to get involved and told me it would be difficult to turn the bank around.
But I pestered him and he eventually relented. He would, at least, hear us out.
Jayne-Anne went down to his home in Weybridge to give a two-hour presentation. He saw enough to realise our bid was credible. He understood, too, that it required a man of his gravitas to shape it. He made some welcome suggestions to the plan, and came up to London a couple of days later to meet the team. But he still wasn't saying yes.
The pressure on us grew. Lee Rochford, Royal Bank of Scotland's Managing Director of Financial Institutions Securitisation (I wonder how he describes himself at parties?) phoned to say that in order to support us they needed to be assured that we would have a suitably qualified chairman. So Jayne-Anne called Sir Brian in Surrey asking him once again to consider. Finally, he agreed. It was a coup. Jayne-Anne phoned Lee to reveal the name. He was delighted: 'That's fantastic news.'
Sir Brian attended all our key meetings – including sessions at the Bank of England, the UK's Financial Services Authority and the Treasury – and he was by far the most distinguished and experienced of all the senior bankers who attended these sessions. Our credibility was established.
In the face of the credit crunch and the sub-prime problems in the United States, our recession planning needed to be faultless. First of all, it had to satisfy the regulators. Our bid chairman was a stickler on that. This was the question we had to ask ourselves, if we were to protect the downside: 'What would happen in the worst-case scenario, in which the housing market in the UK goes into a deep recession?'
The question Sir Brian was posing was a poignant one, as well as a practical one. Once, when Jayne-Anne asked him why he had agreed to join us, he said there were a number of reasons – but one was that he remembered how Northern Rock had looked after miners' families during the strikes of the 1980s. Apparently they stopped asking for mortgage payments while the strike was on, and risked lots of bad debt. But they lost nothing, and the miners and their families kept their homes. Sir Brian said that a business with such an honourable history deserved to be rescued.
Our plan was to inject £1.25 billion of new cash plus Virgin Money as a business. The cash would have come from Virgin, Wilbur Ross, Toscafund and First Eastern, and the plan was to allow the existing shareholders to participate in a rights issue that would enable them, on very preferential terms, to recoup their investment over the coming years.
Unfortunately, it had still to dawn on Northern Rock's shareholders what a bad state their bank was in. Their general feeling was that ours was a poor offer. It wasn't, as became all too clear. We really were being about as generous as we could possibly be – especially given the need to introduce so much new capital to satisfy the regulator's requirements. (Of course, I don't blame the shareholders: as I said earlier, hindsight is easy.)
Two leading hedge funds made it clear to the government that they would vote against the Virgin deal and force nationalisation if the government chose us over their own rescue plan. I feel that kind of rhetoric began to force the prime minister's hand; despite the need for a quick deal, the government couldn't be seen to support us and have the shareholders vote against us. The process was going to be a long-drawn-out one, but we were all set up to work it through.
We reported that without an injection of new capital of £1.25 billion, Northern Rock bank would not be able to withstand a recession of the magnitude of the early 1990s. We disclosed our reasoning and our figures to the FSA and they appeared very happy with our work and prudent assumptions. Indeed, this is my answer to those who suggested that I was only in all this to mug the British taxpayer of billions of pounds at little risk to my own business. Sir Brian explained this to me in stark figures several times. 'We have got to lose £1.6 billion in total as the consortium before the taxpayer loses anything.'
Nevertheless, we were confident. Our plan showed that we could repay all the debts by 2010. By early 2009, according to our figures, Virgin Bank would have lost £300 million; it would break even by 2010, and grow after 2011. This was an enormous risk for all of our equity providers, and for me personally. Virgin's normal rate of return in business is around 30 per cent. The returns here would be about half that – but applied to huge figures. I was entering alien territory. Stephen and Gordon talked me through the process and we weighed up the risk to the group. We all agreed we would press on.
We had to do many presentations to our equity consortium to keep them with us. Late in the day Jayne-Anne presented to Martin Hughes of Toscafund. Given the increasing cost of funding, she wondered if we would need to make people redundant. Martin was adamant that we should carry the cost of excess staff until the business was thriving again – he just didn't want the spectre of job losses to mar our bank. Like most really successful people I've met, Martin was more interested in doing the right and proper thing than the easy and expedient one.
Every night at 6 p.m. the Virgin team hooked up for a conference call led by Stephen and Gordon. It was our opportunity to catch up with each other and agree the next steps. Ours was a collegiate approach, using the wisdom of seasoned banking professionals, each of them a veteran of a significant merger deal. No one else had this treasure chest of knowledge, and I was extremely proud that the Virgin name could attract such top-notch people. In business, this kind of team support is in surprisingly short supply.
Wilbur Ross was a hard taskmaster. Jayne-Anne sat up till the small hours on a number of occasions as he stress-tested her on all the downside scenarios. My business view is always to protect the downside – and this was one of Virgin's biggest ever gambles. Wilbur was much more interested in how much he could lose, rather than how much he could gain. In major bids like this, involving billions of pounds, success comes from identifying the downside – and covering it – far more than planning for the upside. Wilbur wanted to make sure that we were prepared for every eventuality. He became convinced that we were. Sir Brian, the FSA and the Bank of England agreed, and declared us their preferred bidder.
The hedge-fund investors – who had been betting on the share price – were livid at the prospect of us taking over. As we approached Christmas, the credit squeeze was getting tighter and tighter. All over the City, major banks were announcing problems caused by a lack of liquidity. While our lines of funding with RBS and their partners were still open, the cost of that funding was getting more expensive. We began to look at our numbers and we all agreed it was becoming too expensive to borrow. It was starting to look unattractive for us – and we considered withdrawing. It was then that the Bank of England and the government stepped in and offered support by suggesting 'wrapped sovereign bonds'. These were bonds or gilts issued by the government and paid for at a commercial price. All of the bidders would have access to this funding, and so the merits of each proposal could at last be considered with a degree of objectivity.
This would certainly ease the pressure on us, because we knew our bid was already in very good shape.
True, we would as a consequence face stringent European Union restrictions on fair trading. If we were getting government-backed bonds, this would give us an advantage over commercial banks, and we would have to be restricted when competing with them, until we'd paid these loans back. This was only fair, and we had no problem with it. The government said that there would be no dividends until the UK taxpayer was paid back. This, too, was only reasonable: Virgin would have repaid the money back to the taxpayer before we took anything.
The Virgin team were interested and waiting for a term sheet to come out from Goldman Sachs
just as I was heading out to China on a high-level business trip with senior British business figures and Gordon Brown, the prime minister.
We were delayed in leaving because of the emergency landing of British Airways' Boeing 777 at Heathrow. They had lost power in both engines as they descended, and through the immense skill of the pilot the plane had crash-landed on the grass before the runway saving everybody on board. I've had my run-ins with BA over many years but you have to hand it to them: they employ first-rate flight crews. The atmosphere on our flight was one of quiet elation, the surroundings reminding us of the life-saving efforts of the 777's captain and first officer.