Olivant abandons Northern Rock at 11th hour

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Olivant pulled out of plans to rescue Northern Rock on Monday night in a move that confounded British ministers and left just two proposals to take control of the stricken bank.

The private equity group led by Luqman Arnold, the former chief executive of Abbey National, was due to submit its proposal for the bank to ministers on Monday.

However, the group pulled out an hour before the afternoon deadline, blaming the inflexible terms laid down by the government in its financing package.

On Monday night the Treasury was trying to persuade Olivant to come back into the process and a person close to the firm said such a move had not been ruled out.

Alistair Darling, chancellor of the exchequer, was stunned to learn Olivant was pulling out, leaving one bid from a consortium headed by Virgin and another from Northern Rock’s management. Nationalisation also remains an option.

Mr Darling told his officials to ask Mr Arnold to explain the 11th-hour withdrawal. “We were fully expecting them to submit a bid,” the Treasury said.

Olivant had wanted the financing package, which would be made up of a bond issue backed by a government guarantee, to last longer than the three years envisaged by the authorities.

It had argued a longer timeframe would give it more scope to expand and rebuild Northern Rock so the bank could be a strong standalone business after the guarantee is withdrawn.

The firm indicated that sticking to the three-year period would in effect mean shrinking the existing business with little scope to revitalise the bank.

Mr Darling’s team had met the bidders at the weekend and there had been no suggestion from Olivant that any of the Treasury terms were unacceptable.

Olivant’s proposal had attracted the support of Northern Rock shareholders including SRM and RAB, the hedge funds that own 18 per cent of the bank. Last night, RAB indicated it would be willing to put in £50m to £100m in a rights issue if a restructuring proposal by Paul Thompson, the Rock non-executive director, was chosen.

The company’s standalone proposal – which would retain the bank’s tainted name – has been gaining support in recent days from investors who have pledged £400m for any rights issue. The management plans to raise “no less” than £500m in new equity.

Virgin’s proposal involves injecting the most equity – a total of £1.25bn – to help recapitalise Northern Rock.

It plans to inject Virgin Money, which has a valuation of £250m, into the bank, and £500m from partners in its consortium, which includes Wilbur Ross, the distressed debt investor, and Tosca, chaired by Sir George Mathewson. It also plans a £500m rights issue priced at 25p a share.

However, its proposal has not been popular with shareholders who face being diluted to hold 45 per cent of the company. Investors could block any proposal.

Additional reporting by James Mackintosh and Lina Saigol

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