JC Flowers and Virgin lead race for Rock

Shareholders fear they will be left with nothing as the Government seeks to recover its £24bn loan
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Virgin Group and the US private equity company JC Flowers look set to emerge as frontrunners to buy the stricken Northern Rock bank this week.

It is believed the two companies will be included in a shortlist of bidders being drawn up this weekend by the bank's advisory team of Merrill Lynch, Citigroup and Blackstone.

However, Olivant, the investment vehicle set up by former Abbey chief executive Luqman Arnold, is racing to secure financing for its bid, after being granted access to Northern Rock's data room on Friday to carry out due diligence.

Other bidders include Cerberus, the US private equity groups Thomas H Lee and Apollo, ING and a Welsh entrepreneur, Alfred Gooding. It is understood that shareholders in Northern Rock will receive only a minimum amount for their shares.

A banker close to the bidding auction said: "The Government is intent on getting back as much of the £24bn it has lent to prop up the bank as possible. That means the concerns of shareholders are something of a lesser priority."

The Government is being advised by Goldman Sachs and it is believed the investment bank is working alongside Northern Rock's advisors in evaluating the bids.

Investors in Northern Rock fear they might be left with next to nothing in what would amount to a repeat of the 2001 collapse of Railtrack, forced into administration by the Government.

The former Railtrack Private Shareholders Action Group chairman, Andrew Chalklen, said: "It shows the Government's immense hypocrisy. I've no problem with the Government supporting Northern Rock, but it shows how politically motivated the Railtrack issue was. They didn't want it because it was a Tory creation."

Fears about the weakness of Northern Rock's balance sheet grew last week after it emerged that the bank needs an immediate £1bn cash injection. Both Virgin and JC Flowers are prepared to provide the capital, which will probably take the form of a discounted rights issue. The US private equity fund is ready to raise up to £15bn in fresh debt, which it would then use partly to repay the Government's loan. Virgin's bid involves the repayment of between £10bn and £12bn.

Oliphant wants to take a minority stake in Northern Rock and is confident it can secure financing for its proposals, which would see a similar repayment of the government loan. However, it is believed that Northern Rock's board and the Government are leaning towards accepting an outright sale of the bank. Olivant argues that its proposal would allow investors to benefit from any upturn in the share price once the business was returned to a stable footing.

The Government can force though the sale against the wishes of shareholders by threatening to call in its loan – a move that would force the bank into receivership and leave shareholders with nothing.