Montgomery drops out of 'Herald' auction

David Montgomery, the former Mirror chief executive, and 3i, his venture capital backers, are believed to have dropped out of the bidding for The Herald and Sunday Herald, while Spectrum Equity Partners has emerged as a contender.

It is thought Mr Montgomery and 3i have not proceeded to the second round of the auction of the Glasgow-based newspapers, which were put up for sale last month by SMG. Spectrum is a private equity firm originally from Boston, Massachusetts, which is believed to have bid enough to get through to the next round of the auction being conducted for SMG by Greenhill, the investment boutique. All the parties involved declined to comment.

There has been intense interest in the 200-year-old Herald titles, put on the block by SMG after it rejected offers for its TV assets. A number of potential buyers lost out after the bidding breached the £200m level SMG said it was seeking. SMG needs the money to pay back debt by next summer, when its financing facilities run out. A winner of the contest could by announced by the end of this month, leaving enough time for a trade buyer to get regulatory clearance, which could take up to six months.

A City source said: "The trade buyers have bid more than the private equity players. There are six players still in it."

It is thought the Barclays brothers, the owners of The Scotsman, offered the most in the first round.

It is now expected that the Barclays, bidding via their Ellerman Investments vehicle, will go much higher than the other contenders to present an offer that SMG must seriously consider, despite the formidable regulatory hurdles they face.

A Scottish media executive said: "SMG would prefer not to sell to the Barclays. But their [SMG's] problem will come from the shareholders. They would have to explain to them why they turned down the highest bid. That's why the Barclays will go for a knock- out offer."

Even if The Scotsman and The Herald are kept editorially separate, combining the papers' printing and back-office operations would save an estimated £15m a year or £150m over 10 years.

The other four bidders in the second round are a consortium that includes Independent News & Media, the publisher of The Independent and Independent on Sunday, Johnston Press, Gannett and the private equity house Candover.