by Bower, Tom
Gadhia now hoped to transform Virgin Money into a proper bank through the purchase of RBS’s branches. After the FSA, the government regulator, approved Virgin Money’s bid, Branson persuaded Wilbur Ross to pledge $152 million for a 21 per cent stake in the prospective company. On any reckoning, Ross was investing in a dream. Virgin Money did not rank highly among hundreds of competing fund managers, was known only for offering credit cards and mortgages, and had no surplus money. Branson offered less than £400 million for RBS’s 316 branches and promised ‘to save jobs’. RBS rejected his bid, accepting instead Santander’s offer of £1.65 billion.
Buying the Lloyds branches was Branson’s next opportunity, but soon after expressing his interest, he was asked to show that he could raise £3 billion. He retreated without bidding. Unwilling to scale back his ambitions, he would need to change his tactics.
The limitations identified by Rowan Gormley had resurfaced. Branson lacked the expertise and money to create a Virgin bank. Unlike Vernon Hill, the American who had introduced Metro Bank in London in 2010, neither Branson nor Gadhia had a clear-cut, futuristic strategy. Successful banking depended upon faultless computer technology and specialist staff. Based on a perfected model, Metro Bank intended to open 200 branches across Britain by 2016, dependent on training sufficient staff to sustain Metro’s culture. Gadhia lacked the experience to start a similar bank. Surrounded by loyalists, she disliked critics and had not recruited banking experts. Like Branson, she preferred to shine by reviving familiar ideas.
In July 2010, Branson had returned to Sydney – again with a grin and a blonde – to relaunch low-cost Virgin Money credit cards and low-interest loans. ‘We’ve come to Australia to give the banks a run for their money,’ he repeated. ‘Virgin loves coming in where people are being ripped off and there’s no question that people are being ripped off in the banking sector, and in every single product that we’re launching we’re much, much better value.’ Four years earlier, he had acrimoniously divorced Virgin from Westpac after attracting only 6 per cent of the market. He had blamed the collapse on Westpac poaching Virgin customers, but that explanation appeared to be bluster. The business was later reported to have closed after the auditor raised issues about its financial security.
Since that collapse, Australia’s nine banks had consolidated into what Branson called a ‘cosy oligopoly’. ‘There isn’t a lot of competition,’ he said, ‘and the banks are making a lot of money.’ Targeting the 84 per cent of Australians who had never bought life insurance, Virgin needed a partner since the company was not licensed to accept deposits or operate as a bank. Citibank’s executives were persuaded to provide the money and administration to sell Virgin’s investment products, believing that the Virgin brand would attract young investors. The lure was promises of lower interest rates, discounts and free tickets on Virgin airlines. Three years later, Virgin Money had attracted no more than 90,000 active customers. Potential customers were resistant even to Virgin’s advertising campaign. Despite his repeated claims of success, the business lost money every year until Branson quit.
Hype rather than substance characterised his ambitions. His best hope now was to buy the discards of Britain’s banking collapse. The remaining prize was Northern Rock. His fate depended upon the British government.
In 2010, Labour faced certain defeat in the general election. Unconcerned by Gordon Brown’s distress, Branson switched his support to the Tories and urged his new allies to tackle Labour’s £178 billion deficit with immediate spending cuts. ‘It would be dangerous’, said Branson, ‘if we lost the confidence of the markets through delayed action. We’re going to have to cut our spending.’ The Tories were delighted that wooing Branson had paid off. His support, said the then shadow chancellor, George Osborne, was ‘hugely welcome. As Britain’s best-known entrepreneur, he knows more about creating jobs and building an economic recovery than the entire Labour Cabinet put together.’ In private, Osborne was sceptical about Branson but he would not voice any public doubts about Britain’s most popular businessman.
Branson was not surprised by the Tories’ gush but he did not anticipate any profound relationship, just a continuation of the stand-off. The sympathy of British politicians was essential to his commercial survival, and he expected their silence over his legitimate tax-avoidance schemes. Nothing would be said, he expected, about the recent relocation from London to Geneva of the Virgin company responsible for licensing the Virgin brand. In 2009/10, Virgin Group Holdings had paid £10.1 million taxes on revenues of £32.4 million, and still owed £26.9 million in corporation tax. By moving to Switzerland, Branson reduced the company’s future taxes. To satisfy the Inland Revenue’s conditions, Stephen Murphy had personally relocated to Geneva to prove that Virgin’s management was taking all its decisions offshore. Simultaneously, to remove any trace of his domicile or residency in Britain, Branson transferred ownership of his home in Kidlington to his two children. For the same reason, his second Holland Park home had been sold, although he justified it by writing, ‘I came to the conclusion that I didn’t need such a large base in London.’ The completion of Branson’s tax exile passed without comment in Westminster. Too much was at stake on both sides to disrupt the truce.
Soon after the election and the Conservative-led coalition government was formed, one of Branson’s advisers had heard about the secret agreement between the Labour government and the EU Commission that the sale of Northern Rock would have to be completed before December 2013. George Osborne, the new chancellor of the exchequer, decided to advance the sale to 2011. Bids were invited for the bank’s savings and mortgage business, which controlled £21 billion and had a million customers and seventy-five branches. The government’s price of about £1.5 billion excluded the ‘bad’ bank with mortgage loans of £54 billion, which the government planned to discharge separately at no loss to the taxpayer.
The political sensitivities were considerable. Osborne needed to avoid the impression that Northern Rock would be sold cheap or that he would allow the purchaser to earn easy profits. The risks would be particularly high if the buyer was Branson.
To avoid the criticism voiced of him two years earlier, Branson entrusted the negotiations to Jayne-Anne Gadhia. During the ensuing period, she had become a familiar visitor at the Treasury and its agencies, calling regularly to judge the mood and win the officials’ trust. Everyone, she knew, needed to be persuaded that Branson was not involved in the management of Virgin Money. With him excluded, she assured the officials there would be no repeat of Virgin seeking to renegotiate the price after a ‘handshake agreement’. The public, however, would be unaware of Branson’s exclusion as all the announcements were made in his name.
To establish Virgin Money’s trustworthiness, Virgin’s publicists announced that Branson had promised not to fire any of the 2,100 staff and to protect all the branches. For the Treasury, that was a compelling scenario. Gadhia paraded Virgin’s additional credentials, focusing on the appointment of Brian Pitman, a retired banker, as chairman. ‘Even at seventy-five,’ Branson said, ‘he is exactly the cool-headed, strategic banker that the situation demands.’ However, during the negotiations with the government, Pitman died. His replacement was David Clementi, a former deputy governor of the Bank of England and completely trusted by the Treasury. The heavyweight investor was again Wilbur Ross.
Virgin’s opening bid in July 2011 was £1.17 billion, matching the government’s secret valuation. Soon after, Virgin discovered that American investment firm J. C. Flowers, the only rival, had bid considerably less and then withdrawn. To maintain the fiction of a competition, the government conceded ‘exclusive’ negotiating rights to Virgin. In October, the company reduced its bid to £800 million, blaming deteriorating economic conditions and a fall in bank share prices. After negotiations, Virgin’s final offer was £863 million, rising to £977 million if certain profit benchmarks were passed. With no other bidder, the government accepted. The taxpayer had lost £480 million, prompting
Labour’s inevitable complaint that Branson had snatched a bargain. The government replied that Virgin was ‘the best available option to minimise future losses’. Branson had done well, although the financing displayed Virgin’s limitations. The cash price was £747 million plus other costs. Wilbur Ross gave £269 million, Stanhope Investments of Abu Dhabi invested £50 million, Northern Rock ‘lent’ Virgin Money £253 million in a convoluted asset purchase, and £150 million was borrowed. Virgin Money contributed just £50 million, and in return owned about 45 per cent of the institution. The sale was announced in November 2011. In Virgin’s first press release, Ross’s 45 per cent stake was not mentioned. Subsequently, Ross said that he intended to ‘sell out a few years down the road for 1.5 times book value’. In other words, he expected his investment to produce a notional 50 per cent profit.
The news coincided with Branson’s arrival in New York to promote Screw Business as Usual, the book which outlined his despair about the morality of capitalism. ‘My message is a simple one,’ he told invited journalists: ‘business as usual isn’t working. In fact it’s “business as usual” that’s wrecking our planet. We must change the way we do business.’
His message about Virgin ‘transforming itself into a force for good for people and the planet’ was directed at corporations. Instead of seeking profits, he told interviewers, corporations should be doing good for ‘humanity and the environment’. In Branson’s new ethics, there would be no casualties.
At the very moment Branson was preaching social responsibility in New York in 2011, David Baxby, the Australian chief executive of the Virgin Group, was relocating from Virgin’s headquarters in Geneva to Singapore – from one tax haven to another. Baxby praised ‘a very charismatic founder in Richard. He appeals to a lot of consumers that we’re aiming to target.’ While mentioning Virgin’s airlines, mobile telephones and financial services, Baxby revealed that Branson and the Virgin Group were withdrawing from direct management and wealth creation. In the future, he said, Virgin would offer the brand rather than expertise, money, management and a new product. At best, Branson was consolidating Virgin as a venture capitalist selling its label to innovators and risk-takers and avoiding the hard work.
Curiously, Branson’s new book focused praise on minuscule businesses. He identified a grocery, a clothing manufacturer and a producer of frozen organic meals and Cornish pasties. Implicitly, he disliked rival tycoons. After forty-five years, he recognised his weakness. The magic of the early era, when he had employed like-minded mavericks seeking fun and cash, had gradually been diluted, until finally the spell of creativity had evaporated. The pioneers’ replacements were traditional managers whose conservative accountancy suffocated risky originality. The idol feared that his flame was dying, and Screw Business as Usual was his latest intuitive attempt at renewal. Virgin needed to be redefined with a new sense of purpose. Implicitly, Branson admitted an inability to beat his rivals. Instead, he mocked them.
During those weeks promoting the book, Branson disparaged Steve Jobs – then still alive – as a ruthless executive. ‘That isn’t the way it should be done,’ he said about Jobs’s management of Apple. ‘An entrepreneur who treads over people to get to the top is rare. Too many business leaders are too quick to jump down people’s throats, or rule by fear, which is foolish. You should lead by praise – you can’t launch an idea if no one likes you.’
In New York, he told his audience about Northern Rock, ‘We’re sitting back trying to work out radical ways of running it differently than banks have been run in the past.’ As a new banker, he said, he would be offering small loans to the poor at advantageous rates. He appealed to his brethren in Wall Street to follow his example by no longer ‘ripping off their customers’ and asked them to ‘use their bonuses to repair the damage they have caused’.
‘The richest clown on earth,’ was a polite riposte from Wall Street. Corporate America was not minded to take lessons from Branson, but some executives were interested to watch whether he practised what he preached. Branson’s purchase of Northern Rock would be the test of Virgin’s new saintliness as his corporation aimed to fulfil, as he wrote in his book, his ultimate object of ‘a fairer distribution of wealth’.
Back in the UK, and dressed in a Newcastle United football shirt, Branson arrived at the bank’s headquarters to repeat his promise to neither close branches nor dismiss any staff. Virgin, he told his audience, planned to double the number of customers from four million to eight million (the numbers kept changing) and to triple the number of branches. ‘Our customers’, he said, ‘showed that they trusted the Virgin brand to the extent they would stop withdrawing money on the basis that Virgin would buy it.’ In reality, the withdrawals had stopped within hours of the government promising in 2009 to protect all deposits and loans. He also pledged that Virgin Money would offer free banking to those with current accounts, which would be introduced ‘by 2013’. With pride, he boasted that the bank was worth £1 billion, a quarter more than he had paid four weeks earlier. Boasting about windfall profits at the taxpayers’ expense seemed to contradict his sermon advocating the alternative to ‘business as usual’.
The reality was unveiled one month after he had attacked banks in New York for ‘ripping off’ their customers. Virgin Money announced charges on current accounts which had previously been free, and declared that the interest rates for 25,000 credit-card customers judged to be ‘risky’ would rise by 50 per cent. How much Branson knew about those changes was uncertain. In Screw Business, he had criticised pure profiteering by the banking community for ‘wrecking our planet’. He continued, ‘We can’t charge one group of customers more than another or less than another. We can’t find a way to tack on a hidden charge … Why? Because none of those things make everyone better off.’ To some, Virgin Money appeared to be no different from other building societies, except that, in this case, British taxpayers, on Branson’s own account, had lost out to a tax exile.
The blowback of Branson’s triumphalism provoked a Guardian writer to suggest that ‘Virgin is built on the back of taxpayer subsidies.’ The company’s profits, he wrote, depended upon ‘operating heavily protected businesses’. Among the examples managed by Virgin itself were the company’s airlines, Virgin Trains, Virgin Care and now Virgin Money. All were dependent on protection by government regulations, government contracts or the provision of taxpayers’ money. Together they amounted to over 80 per cent of Virgin’s revenues.
‘This is of course complete garbage,’ replied Branson the following day. ‘Ninety-nine per cent of our businesses have nothing to do with government at all and have been built in the face of ferocious competition.’ The Guardian’s allegation, he continued, is ‘an insult to our 50,000 wonderful staff’. He claimed that Virgin Trains was not dependent on the state. ‘Far from receiving subsidies, we now pay more than £100 million a year to the taxpayer’ – a comment which was somewhat difficult to reconcile with the fact that Virgin Trains was receiving more than £100 million in profits and subsidies from a government franchise.
The more profound weakness went unmentioned in Branson’s reply: the absence of a coherent strategy at Virgin Money to guarantee success. In Branson’s mind, the merger of Virgin Money with Northern Rock was accomplished by replacing the signs on the high street. Both he and Gadhia heralded Virgin’s banking revolution, but neither fully understood the enormity of removing what the industry called ‘the legacy products’ or ‘the platform’ from Northern Rock. To modernise Northern Rock’s technology, its staff and the branches was complex. Merging it with Virgin Money under a single ethos was challenging. Gadhia had not yet mastered the detail of creating a bank to offer customers current accounts and banking cards. She lacked personal experience of the design of modern banking emporiums. Her expertise lay in paying commission to brokers for selling mortgages and insurance. The result was that one year after the purchase, Virgin Money’s branches still resembled historic edifices. The four new Virgin Money Lounges
scattered around Britain were small and appeared to be deserted. Other than pledging to offer current accounts by the end of 2013, Gadhia had not produced profitable results from a convincing strategy.
The truth about Virgin Money was portrayed after Santander abandoned the £1.65 billion purchase of 316 RBS branches. Santander’s explanation was the incompatibility of the two banks’ IT systems. Even for a banking giant, the cost of solving this would dwarf any potential profits. Within hours of the announcement, Virgin’s publicists encouraged newspapers to report that ‘Virgin Money pounces on RBS branches’. Reflecting Branson’s bravado, Virgin Money was characterised as ‘the most credible competitive threat to Britain’s big banks’. Previously, Branson had offered less than £400 million for the branches but, given another chance, he slunk away. Virgin Money was still a building society, not a bank.
In the background, Branson knew, Wilbur Ross was waiting for Virgin Money to be floated so he could collect his profits. Branson spoke about a £2 billion sale – an ambitious target with Virgin Money struggling to break out of a financial straitjacket. Branson was searching for other sources of income. As usual, the most attractive was taxpayers’ money.
14
‘Virgin Dope’
‘That’s music to our ears,’ said a Virgin executive after hearing Tony Blair announce in 2003 that the NHS would buy services from private hospitals. Private contractors would be guaranteed earnings from the NHS’s annual £100 billion budget. For Virgin, profiting from the NHS appeared to be similar to the millions of pounds the company received from British taxpayers for running Virgin Trains.