Stock Exchange Announcement

26/11/2007Northern Rock PLC - Update on Strategic Review

RNS Number:4586I
Northern Rock PLC
26 November 2007


                       Northern Rock plc (the 'Company')

                           Update on Strategic Review

Following receipt of indicative expressions of interest covering a range of
options in respect of its business, the Company and its advisors have engaged in
discussions with a limited number of selected interested parties to clarify
their proposals. As a result, and following discussions with the Tripartite
Authorities (the Bank of England, HM Treasury and the Financial Services
Authority), the Board has concluded that it wishes to take forward discussions
on an accelerated basis with a consortium comprising Virgin Group, WL Ross & Co,
Toscafund Asset Management LLP and First Eastern Investment Group (the 'Virgin
Consortium').

Bryan Sanderson, Chairman of Northern Rock, said

'This is very good news for Northern Rock. Over the last few weeks and months we
have looked at the issues from the perspective of all stakeholders. I am
grateful for the support that we have had from customers and employees who have
stayed loyal to us during these difficult times - and pleased that a solution
that firmly restores the Company's prospects has been identified. Furthermore
our retail depositors can be fully reassured that the Government has said it
will ensure savers' money is safe whatever the outcome.'

The Virgin Consortium Proposal

The Virgin Consortium is continuing its discussions with the Company and the
Tripartite Authorities and is working on finalising its proposal as soon as
possible. This is subject to all necessary regulatory approvals being obtained.
Under the Virgin Consortium's indicative proposal, £11 billion will be repaid to
the Bank of England at completion of the transaction - and the Bank of England
will have a clear path towards repayment in full. The Virgin Consortium also
proposes that all interest accruing to the Company's financing sources,
including under the Bank of England facilities, will be paid in cash rather than
rolled-up for payment in due course. Under the Virgin Consortium proposal,
additional substantial funding facilities are also to be put in place to ensure
appropriate financial flexibility for the Company going forward.

The Virgin Consortium's indicative proposal is as follows:

   * £1.3 billion of new cash and the Virgin Money business will be injected
     into Northern Rock for an issue of new ordinary shares in each case. The
     implied value of Virgin Money is £250m.

   * Of the cash amount:

        o  half will be provided by the Virgin Consortium and

        o  half will be raised through an offer to existing holders on the
           relevant record date of new ordinary shares in Northern Rock on a pro
           rata basis at a price of 25 pence per new ordinary share (the
           'Offering'). The Virgin Consortium will arrange for the Offering to
           be fully underwritten.

   * The injection of Virgin Money will take place on the same pricing basis
     as the Offering and, if the Offering is fully taken up by existing
     shareholders, the Virgin Consortium will hold no more than 55% of the
     Company once the transaction has been concluded.

The Virgin Consortium intends that Northern Rock will be re-branded Virgin, its
stock market listing will be retained (subject to the eligibility criteria
contained in the Listing Rules) and the Company will continue as a going concern
without any break-up of the business. The Virgin Consortium has informed the
Board that it has no current intention of making any material reduction in
employment in Northern Rock and intends to continue to operate the business from
Newcastle upon Tyne and in the North-East of England. The Virgin Consortium
expects that the Company will quickly re-build a deposit base to drive a more
sustainable funding structure and is targeting a credit rating of no less than
'A'.

The Virgin Consortium intends that the Northern Rock Foundation will continue to
participate in the profits of the Company. In addition, in recognition of the
contribution of HM Treasury and the Bank of England to the restructuring of
Northern Rock, the Virgin Consortium will make an additional profit
participation payment to the Northern Rock Foundation of £10m in each of the
financial years up to 2015 that the Company's pre-tax profits exceed £638m
(being the aggregate of the pre-tax profits of the Company and Virgin Money for
the financial year 2006), for a maximum of five financial years.

The Virgin Consortium intends to capitalise on the strength of the Virgin brand,
the introduction of additional management and experience from the current Virgin
Money business, and the funding and liquidity solutions to be delivered by the
Virgin Consortium partners to rebuild the Company's franchise on stronger
foundations. The Virgin Consortium believes that together with the Company it
can bring the business a renewed confident future for the benefit of all of the
Company's current stakeholders.

Under the Virgin Consortium proposal a new management team will be put in place
to take the Company forward, led by Sir Brian Pitman (formerly Chairman and CEO
of Lloyds TSB Group plc) as Chairman and Jayne-Anne Gadhia as CEO, and supported
by Sir George Mathewson (formerly Chairman of The Royal Bank of Scotland plc) as
senior adviser.

About Virgin Money

Virgin Money Holdings UK Limited and its subsidiaries ('Virgin Money') have
rights to use the Virgin brand in retail financial services in the United
Kingdom. Virgin Money, based in Norwich - East Anglia was established in 1995
(as Virgin Direct, as it was then known) and has grown to become an established
retail financial services enterprise, with over £2.5bn of funds under
management, circa 1.9 million credit card customers via its affinity arrangement
with Bank of America, the provision of general insurance products in conjunction
with UK Insurance (a division of The Royal Bank of Scotland plc) and the
provision of life and cancer cover in partnership with Scottish Widows.

Virgin Money's consolidated gross assets as at 31 December 2006 per its
statutory accounts were £34.9 million. Virgin Money's consolidated profit before
tax for the year ended 31 December 2006 per its statutory accounts was £10.2
million. Virgin Money has continued to grow very strongly during 2007.

It is proposed that Jayne-Anne Gadhia, the current Chief Executive Officer of
Virgin Money, be appointed an executive director of the Company. The service
contract for Mrs Gadhia in the proposed role will be finalised in due course.

Treasury Guarantee

HM Treasury has confirmed that the guarantee arrangements for depositors in
Northern Rock cover all retail deposits, including future interest payments,
movements of funds between accounts and term deposits for the duration of the
term. If the Company's strategic review does not lead to a corporate
transaction, HM Treasury will maintain these guarantee arrangements until it is
satisfied that the current financial market instability is over and the position
of depositors is protected. In the event of a corporate transaction, the
Tripartite Authorities would satisfy themselves that the business was
financially secure and depositors were protected. In any event, the guarantee
arrangements will not be brought to an end without reasonable notice.

Approach of the Tripartite Authorities

On 19 November 2007 the Tripartite Authorities issued a statement of principles
which set out how they expect to approach proposals for the future of Northern
Rock and its business, in particular considering the objectives against which
the Tripartite Authorities expect to assess proposals received by Northern Rock.
The Tripartite Authorities have confirmed to the Company that those principles,
and the objectives which they have previously announced, continue to apply.

In reaching agreement with Northern Rock that discussions about its proposal
should go forward on an accelerated basis, the Virgin Consortium has at the same
time confirmed to HM Treasury and the Bank of England that any transaction will
be predicated on the following principles:

   * its equity and debt financing proposals will, at the point of
     announcement of a definitive transaction, be fully underwritten;
   * as included in the Virgin Consortium's proposal, the private sector debt
     financing must be comparable in scale to any public sector debt financing
     required following closing;
   * the public sector debt financing required must be on comparable terms,
     including as to ranking in time of repayment and point of priority, as the
     private sector debt financing envisaged by the proposal;
   * there must be binding incentives for the delivery of the Virgin
     Consortium's plan for achieving appropriate credit ratings, bringing to an
     end any public sector guarantee arrangements, repaying the public sector
     financing and terminating any other public sector commitments; and
   * returns on equity investments made by members of the Virgin Consortium
     and other holders of ordinary shares must be restricted until the public
     sector loans have been paid back with interest and all other public sector
     commitments are at an end.

It should be noted that in addition to these requirements, the regulatory
requirements of the Financial Services Authority (including as to business plan
and control of Northern Rock) must be met and EC state aid requirements complied
with.

Other aspects

The Board is also continuing to explore other options as part of its strategic
review. Northern Rock reminds all stakeholders that there can be no certainty
that the discussions with the Virgin Consortium will lead to a transaction in
relation to the Company or all or any part of its business.

The Company has agreed to cover certain out-of-pocket expenses, not exceeding £5
million (plus applicable VAT), in connection with the indicative proposal,
including meeting the professional advisory costs of the financing banks on the
basis that the Company expects to be able to make use of such finance whether or
not the transaction proceeds.

Extraordinary General Meeting

On Friday 23 November 2007, the Board received a notice from certain
shareholders in the Company claiming to hold not less than one-tenth of the
fully paid up voting share capital of the Company requiring the Directors of the
Company pursuant to section 303 of the Companies Act 2006 to convene an

extraordinary general meeting to consider and if thought fit to pass a special
resolution requiring shareholder approval for a disposal in any 12 month period
of more than 5 per cent. of the aggregate book value of the Company's assets.
Whilst it does not consider such action to be warranted or appropriate,
particularly at a time when the Company is actively engaged in its strategic
review, the Board is in the process of establishing that the requisition notice
has been properly served and, if this is the case, will make the necessary
arrangements to convene such a meeting within the required timetable to consider
the proposed resolution. The Board will give its view on the merits of the
proposal at the time the notice of meeting is sent to shareholders.


Press Contacts

Brian Giles
Communications Director
0191 279 4676

John C Watson
Corporate Communications
0191 279 5295

Ron Stout
Corporate Communications
0191 279 4921

James Murgatroyd
Finsbury Limited
020 7251 3801


Important Notice

The Blackstone Group International Limited ('Blackstone'), Citigroup Global
Markets Limited ('Citi') and Merrill Lynch International, which are authorised
and regulated in the United Kingdom by the Financial Services Authority, are
acting exclusively for Northern Rock plc and no-one else in connection with the
matters referred to in this announcement and will not be responsible to anyone
other than Northern Rock plc for providing the protections afforded to clients
of Blackstone, Citi or Merrill Lynch International nor for providing advice in
relation to the matters referred to in this announcement.


                      This information is provided by RNS
            The company news service from the London Stock Exchange

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