Chancellor announces sale of Northern Rock to Virgin Money

Chancellor of the Exchequer George Osborne said the sale was an "important first step in getting the British taxpayer out of the business of owning banks".

The Government said in a statement that the combined banks would establish a new competitor in the UK retail banking sector, leading to an increase in choice for high-street customers.

Virgin Money will pay £747 million for the bank on closing of the sale and an expected £50m within six months of completion. A further £150m will be paid in the form of a capital instrument, and an additional cash consideration of between £50-80 million will be payable within the next five years if the bank is sold or shares are offered on the stock market.

Northern Rock's shares were transferred into temporary public ownership in 2008 after its near collapse. The bank was then split into two separate entities: savings and mortgage bank Northern Rock plc; and Northern Rock (Asset Management) plc which retained the bank's bad debt.

The Government said it had no plans to sell Northern Rock Asset Management which was integrated into a single holding company, UK Asset Resolution (UKAR), with Bradford and Bingley in 2010. UKAR has implemented a business plan that aims to wind down the company in a way that enables it to repay a combined debt to the taxpayer of around £50 billion.

Banking law expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said that sale would hopefully be a "welcome development" for the banking sector, which is currently considering the implications of regulatory reform.

"Whether it also helps deliver the Government's wider strategy of safer ring fenced banks will depend on the internal governance and future business units and investment activities of the new combined bank," he said.

In September the Independent Commission on Banking, which was set up by the Government to look at possible structural reform, recommended the separation of retail and investment banking operations by 2019. This 'ring fencing' would make it easier to protect customers against investment banking losses by allowing different parts of a bank to be treated in different ways if they got into difficulty.

As part of its deal with the Government Virgin Money has committed to no further compulsory redundancies for at least three years after the sale is completed. It has also agreed to make Newcastle - where Northern Rock is currently based - the operational headquarters for the combined business.

Virgin Money has also agreed to retain and extend the total number of bank branches "as business growth allows", and to maintain and extend support for the bank's charitable arm the Northern Rock Foundation for another year.

Northern Rock said in a statement that its addition to the existing Virgin Money business would create a group with over four million customers and a nationwide network of branches. Its existing customers would experience "business as usual", with no changes to their terms and conditions as a result of the announcement.

However, the combined bank will be rebranded as Virgin Money once the sale is complete.

Ron Sandler, executive chairman of Northern Rock, said the bank's return to the private sector had always been one of its "key objectives".

"We said that this would be done at the right time and when there was a proposition in the best interests of taxpayers and other stakeholders. I am delighted that we have reached an agreement with Virgin Money which successfully delivers that," he said.

George Osborne said that the sale would "increase choice on the high street for customers and safeguard jobs in the North East".

Pending EU merger clearance and approval by the Financial Services Authority the sale will be completed on 1 January 2012, the Government said.