Northern Rock rivals in dash for finance

Virgin, Olivant and JC Flowers in intensivetalks as they fine-tune their bids for the ailing lender
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The Independent Online

The battle for control of Northern Rock will intensify this week. Olivant, the investment vehicle run by former Abbey National chief executive Luqman Arnold, is expected to submit its offer for the ailing bank in a move to rival a bid submitted by Sir Richard Branson's Virgin Group.

It is believed JC Flowers, the US private equity group, is also preparing to submit a revised proposal this week, after an initial approach was deemed inferior to the offer put forward by Virgin.

Olivant is holding intensive talks with banks over the weekend in a bid to secure the required financing to press ahead with a formal offer for Northern Rock. Executives close to Olivant expressed confidence that it would be able to find the required 10bn-12bn.

One banker said: "If Virgin can get the financing, then Olivant should be able to as well." Virgin's bid has already won the approval of the Treasury.

Mr Arnold met with senior officials from the Bank of England, the Treasury and the Financial Services Authority last week and has convinced them that his offer has merit. Olivant wants to take a large minority stake in Northern Rock and run it as a going concern. Virgin wants to buy the bank outright, a move that will see shareholders in Northern Rock lose out. Virgin has promised immediately to pay back 11bn to the Bank of England, which has so far issued Northern Rock with 26bn in emergency loans.

Investors in the bank are supportive of Mr Arnold's plans to run Northern Rock as a going concern. Hedge fund SRM, with a 9.1 per cent stake, and RAB Capital, with 6.66 per cent, are opposed to the Virgin bid.

The Virgin consortium is offering to put in 1.3bn of funds into the Rock in return for a stake of at least 55 per cent, with some of the funds raised by offering shareholders further shares at a discounted 25p each.

The deal is thought to value Northern Rock at around 225m a fraction of the 5.2bn value seen in February before summer's crisis hit. Olivant's bid is more attractive to shareholders because they would benefit if it succeeds in stabilising the bank's finances.

JC Flowers, seen last week as a frontrunner in the race to buy Northern Rock, threatened on Friday to pull out of the auction. A report said the US private equity group may abandon its bid after becoming frustrated that Treasury officials were unwilling to meet its advisers.

The Government wants to ensure all the money it lent to the Rock will be repaid on a par with other creditors and wants shareholders to be offered some exposure to any turnaround.

A banker with links to JC Flowers said yesterday that it may be prepared to revise its bid to meet the Government's demands if it is granted a level playing field to bid against Virgin.

Shares in Northern Rock dropped sharply on Friday before closing marginally up at 118p.