More financial illiteracy fun with Northern Rock

From The Telegraph:

Richard Branson’s Virgin Money has been accused of “asset stripping” following leaked details about the structure of Northern Rock’s sale. The sale of Northern Rock, which netted the Government £747m in cash is being part funded by existing cash in the bank itself. More than £250m of “excess capital” will be taken out from Northern Rock to help pay for the bank.

Oh dear, oh dear, oh dear, where to start?

When a company is being bought/sold, it is fairly usual to agree a target net asset value for the company in advance, and the purchase price paid on completion is adjusted up or down if the actual net asset value at the date of completion happens to be higher or lower than the target (which it usually is). So if the current owner of the company whips out £1,000 on the day before completion, it is of no advantage to him and the purchaser isn't bothered because the final selling price is then adjusted downwards by £1,000.

So VM paid £747 million for a company (or group of companies) with a net asset value of £912 million*. If NR really had £250 million in spare cash sloshing about, then in theory the government could have taken out that money and agreed a lower selling price of £497. Whether the government takes out the money and accepts a lower selling price or VM takes out the money and pays a higher selling price does not make the blindest bit of difference.

* NR's balance sheet total as at 30 June 2011, minus six months' anticipated losses to date of completion January 2012 minus £150 million in bonds which the government has allotted to itself.

Via MBK.