Olivant goes to the brink with demands for better Rock deal

Olivant yesterday embarked on a game of brinkmanship with the Government over Northern Rock, pulling out of the bidding race for the mortgage bank just hours before the deadline for takeover proposals to be filed.

The investment group said that the Treasury's conditions were so onerous that it could not make a bid stack up. Olivant, headed by the former Abbey National boss Luqman Arnold, failed to submit a proposal by yesterday's 4pm deadline, though it is understood that it would still come back to the bidding in certain circumstances.

Mr Arnold's main objection to the terms is understood to be the three-year limit on the duration of the bonds that the company would issue with a Government guarantee. Olivant wants the guarantee to last five years.

Rumours circulated earlier in the day that Olivant was trying to extract more favourable terms from the Government. Last night neither side was ruling out further talks. The Treasury is said to view the three-year term of the bonds as a "base case" and not something set in stone.

Mr Arnold said: "Despite working intensively, we have been unable to formulate a value creation proposal which meets our investment criteria whilst also respecting HM Government's proposed financing terms and the interests of other stakeholders in the company."

Olivant has threatened to walk away before and was able to extract more favourable treatment from Northern Rock in December by doing so. But unless Olivant returns to the table, the Government is now left with just two proposals for taking over Northern Rock.

Sir Richard Branson's Virgin Money consortium submitted an improved proposal that gave the Treasury a stake in a future revival of Northern Rock.

Virgin's proposal would inject £1.25bn of new equity into Northern Rock. Existing shareholders would buy £500m of new shares in a 4.7-for-one rights issue at 25p a share. Virgin would buy a further £500m of shares and put its own Virgin Money business, which it values at £250m, into the bank.

Virgin said it would give the Treasury a warrant over part of the bank's share capital. The Government had demanded such an arrangement so that the taxpayer could gain from any revival of the business.

Northern Rock's board also submitted a proposal for the company remaining independent. Under the plan, Paul Thompson, the former chief executive of Resolution, the insurer, would be the the chief executive. Andy Kuipers, who has been the chief executive since December, would be his deputy.

Mr Thompson's plan would inject at least £500m of new equity into the bank. The business would be shrunk and restructured with a view to growing it in line with its ability to raise retail and wholesale funds. Northern Rock has sent the proposal to other bidders so that they can improve their offers if necessary.

Olivant's proposal had been favoured by the two hedge funds – SRM Global and RAB Capital – that built up a combined 18 per cent stake in Northern Rock to thwart Virgin's dilutive plan and the threat of nationalisation.

In the absence of an Olivant bid, RAB said it would support Northern Rock's stand-alone proposal.

The Government could take until the end of the month to choose its preferred offer. It needs approval from the European Commission by 17 March, the cut-off date for the current emergency funding.

Northern Rock shares closed down 8 per cent at 88p, having earlier been up by more than 10 per cent.