Olivant pulls out of race to rescue Rock

GORDON Brown's hopes of avoiding nationalising Northern Rock were dealt a blow last night when one of the three contenders to run the crisis-hit bank pulled out of the race at the 11th hour.

The Olivant investment group announced its withdrawal from the battle to take over the troubled institution less than two hours before the close-of-market deadline set by the government.

Olivant's surprise move left Sir Richard Branson's Virgin Group and the bank's own board as the only two contenders to rescue the bank.

Last night Branson's bid was seen as the front-runner, but some analysts cautioned that the narrowing of the choice available increased the likelihood of temporary nationalisation – an option opposed by the Prime Minister.

That was reinforced by the reasons for pulling out given by Olivant, headed by Luqman Arnold, the former Abbey chief executive. The group said it was unable to come up with an offer that could satisfy its investment needs, the government's financing terms and the interests of Northern Rock stakeholders.

Olivant was said to be unhappy with the government's insistence on repayment of its £55 billion rescue package within three years, as opposed to five.

The group's proposal had attracted the support of shareholders including SRM and Rab Capital , the two hedge funds that own 18 per cent of Northern Rock. Rab chief executive Philip Richards said last night: "We've always said that we wanted to see a strong and independent solution for Northern Rock. In the current circumstances, there is only one strong and independent solution available, in the shape of the proposal from the Northern Rock team led by Paul Thompson."

Under Virgin's plans, Northern Rock would be rolled into its financial services operation, Virgin Money, and rebranded as Virgin Bank.

If successful, the consortium plans to inject £1.3bn of new equity into Northern Rock. Half of the money will come from the consortium, with the remainder being raised through an offer to existing Rock shareholders to buy new shares for 25p each.

The group plans to take no more than 55 per cent of the company once the transaction has been concluded.

The alternative is the "self-help" option, which would see an in-house rescue of the group. Led by non-executive director Paul Thompson, the management has already indicated that an internal solution would see the bank run as a smaller company.

However, despite proposals from two remaining bidders, nationalisation is still an option.

Howard Wheeldon, senior strategist with BGC brokers, said: "With Olivant gone, the government is up a creek without a paddle." He added: "Nationalisation has now gone from number three on the list of possibilities to number one."

The "tripartite authority" of the Treasury, the Financial Services Authority and the Bank of England have a number of demands that must be met before they offer any private suitor the funding. Until it is clear these will be addressed, nationalisation is still a distinct possibility. Last night the Treasury refused to comment but it is understood that no other bids were submitted.

Northern Rock sought a Bank of England bail-out in September as its borrowing costs soared in the credit crunch – sparking the first run on a UK bank in more than 140 years.

GHADIA LINED UP TO TAKE CHARGE

IF RICHARD Branson's bid to take control of Northern Rock succeeds, an Edinburgh-based businesswoman will be the chief executive of the rebranded Virgin Bank.

Jayne-Anne Gadhia, 46, is the managing director of Virgin Money and has masterminded the company's campaign.

She is a former head of Royal Bank of Scotland's mortgage business. Ms Gadhia said last night that the Virgin proposal would protect taxpayers' interests. She added that her group had a clear strategy for repayment of the proposed financing package arranged by the Bank of England and the Treasury.

Ms Gadhia said: "We propose to maintain a meaningful participation for the charitable Northern Rock Foundation in the profitability of the revitalised company."