Arnold plans £800m Rock rights issue

Olivant, the private equity group, moved to elbow aside Virgin Group in the race to rescue Northern Rock by outlining an alternative plan that would repay the government’s emergency loan to the troubled lender more rapidly and give taxpayers a stake in its recovery.

The proposal, fronted by Luqman Arnold, the former chief executive of Abbey National, would see Olivant invest £150m of equity in Northern Rock. Up to £650m of equity would be provided by existing shareholders, £440m of which was already underwritten by investors controlling 23 per cent of the bank.

Olivant said its investors were “blue-chip” institutional investors and family offices. At yesterday’s share price, Olivant would have a stake of around 15 per cent in the bank.

Northern Rock last week named Virgin as preferred bidder but it continues to solicit offers for the company behind the scenes. JC Flowers withdrew from the contest on Thursday, although the government is thought to be seeking a meeting with the US private equity group to establish what it meant when it said it could come back if the “parameters” of the situation changed.

Olivant would offer the government some protection against embarrassment if Northern Rock staged a dramatic recovery and enriched its new private equity owners. The Bank of England would receive warrants giving it 5 per cent of Northern Rock’s equity if the share price rose substantially. Olivant would receive identical warrants over 7 per cent of the company.

The Bank would also receive immediate repayment of between £10bn and £15bn of the £25bn-plus of funding it has advanced to Northern Rock since the run on the lender in mid-September, with the remainder expected to be repaid by 2009. Virgin is proposing to repay £11bn immediately, and the balance by 2010.

Mr Arnold said he would not detail how his business plan facilitated the speedier repayment of the Bank’s facility, for fear of handing an advantage to rival bidders. However, he indicated that Olivant would shrink the company.

“Ours is a faster route to certainty,” he said. “Northern Rock could put [our management] in place before Christmas.”

He said initial repayment of the Bank’s facility would not be possible until February, when the European Commission is expected to rule whether the government’s support for Northern Rock could continue as designated restructuring aid.

Olivant would retain the Northern Rock brand, and Mr Arnold would be executive chairman until the Bank was fully repaid. He would recruit a chief executive, looking internally in the first instance, so that he could become a non-executive chairman.