Northern Rock nationalization looms

LONDON (Reuters) - Shares in Northern Rock NRK.L fell as much as 7 percent on Monday as the likelihood it will be nationalized increased after Britain's government lined up veteran executive Ron Sandler to potentially run the bank.

Stepping up pressure on the battered mortgage bank's shareholders ahead of a key meeting on Tuesday, the government has invited Sandler, former head of the Lloyd's of London insurance market, to step in as executive chairman should Northern Rock be nationalized.

Northern Rock is Britain's biggest casualty of the credit crunch and has borrowed about 26 billion pounds from the Bank of England since it requested emergency funds in September.

By 1000 GMT Northern Rock shares were down 4.6 percent at 83.25 pence after touching 81p, valuing the bank at just over 340 million pounds ($665 million).

If Northern Rock is put under state control shareholders could receive nothing or little for their shares. Sandler said on Saturday he would take the helm in such an event, but no decision had been taken.

Northern Rock said on Monday it continued to work on getting a private sector solution. It has been in talks with two consortia led by Richard Branson's Virgin Group and investment firm Olivant, but tough credit market conditions have stoked speculation both are struggling to raise funds.

Britain's fifth-biggest mortgage lender said the appointment of Sandler was a matter for the Treasury, but observers said it appears state ownership for at least a short period is now the most likely option.

"It is very difficult to see any practical alternative to Northern Rock's future after so much indecision," said David Buik of Cantor Index.

Some viewed Sandler's appointment as designed to raise pressure on investors to back Northern Rock when they vote on resolutions to restrict the board's ability to sell assets or issue new shares.

Hedge funds SRM and RAB Capital, the bank's two biggest shareholders with a combined 18 percent stake, are urging other investors to vote for the proposals to restrict the board's actions at the vote.

"If RAB and SRM win tomorrow, we believe a rescue deal will be much harder to achieve and the government will very likely nationalize the bank. We feel this will leave very little for equity shareholders," said Alex Potter, analyst at Collins Stewart.

"If the hedge funds lose, a rescue deal is still not guaranteed and unlikely to be materially above the current stock price in any case," Potter added.

The Financial Times on Monday quoted people familiar with the process as saying there is now a less than 50 percent chance the bank will be sold -- unless shareholders stand down in their efforts to block a deal.

Last week, finance minister Alistair Darling warned Northern Rock shareholders they would not be seen as a priority above depositors and the British taxpayer. He said at that time a nationalization would be temporary.

(Reporting by Clara Ferreira-Marques and Steve Slater; Editing by Erica Billingham and Sue Thomas)