N. Rock rescue list shortens as auction stumbles

Britain's plans to extricate itself from the collapse of mortgage bank Northern Rock stumbled as it faced the prospect of an auction with only two bidders, unless it changes the terms of the sale.

Richard Branson's Virgin Group and an "in-house" management team have made rescue offers and the government is keen on a private-sector solution after a four-month crisis has added to a slump in Prime Minister Gordon Brown's popularity.

A third potential suitor, investment firm Olivant, quit the race but would consider re-entering if the government was willing to reconsider the terms, a person familiar with the situation said yesterday. However, it has no immediate plans to re-enter, the person added and declined to comment further.

"The one thing for sure is that the government has egg smeared all over its face," said Howard Wheeldon, a senior strategist at brokerage BCG Partners.

Olivant, headed by former Abbey chief executive officer Luqman Arnold, quit after saying it was unable to put together a proposal that met its investment criteria and that of other stakeholders.

It wanted to repay a £25 billion loan from the government over five years, whereas the government wants to be repaid within three years.

Olivant has been one of the front-runners to save Northern Rock since shortly after the bank was forced to seek emergency loans from the Bank of England in mid-September, sparking the first run on a major UK bank for over 140 years.

Olivant threatened to leave the auction in December but stayed in after the government said it would consider it on equal terms with Virgin.

The government is likely to be tied to Northern Rock's fortunes for years to come after it guaranteed bonds that will be sold to repay taxpayers.

Olivant's departure raised the risk that the government would decide that none of the proposals meets its requirements, which could see Northern Rock temporarily nationalised.

"We still cannot see positive value creation in Northern Rock; the Olivant withdrawal statement yesterday was most telling," said Sandy Chen, analyst at Panmure Gordon.

Full details on both the remaining offers have not been disclosed, and each faces concerns - Virgin's offer is highly dilutive for shareholders, while the in-house proposal retains a tarnished brand and lacks financial details.

Both would pursue low-risk strategies and shrink Northern Rock's mortgage book to ensure European regulators don't block the government-backed funding package. Once the loan has been repaid they could implement modest growth plans.