A consortium led by Richard Branson's Virgin Group has been picked as the preferred bidder to rescue Northern Rock and plans to repay £11 billion quickly to the Bank of England.
Virgin's proposal may calm a mounting political dispute about the use of taxpayer funds to help Northern Rock and also offers some potential upside to shareholders, and analysts said both factors are likely to have sealed its success.
Northern Rock said the Virgin consortium had set out a clear path to repay fully loans to it from the Bank of England that are estimated to have reached £25 billion since a crisis around the bank erupted in mid-September.
"Undoubtedly the fact they are offering to pay back £11 billion on day one and then to rank the government pari passu with the other creditors is absolutely critical in winning the political approval for the deal," said Simon Maughan, bank analyst at MF Global.
Against political concerns a buyer could reap a quick profit, Northern Rock also said returns on Virgin's investment would be restricted until the public sector loans had been paid back with interest.
Virgin's consortium, which includes buyout firm WL Ross, investment group Toscafund and Hong Kong-based investment group First Eastern, said under its plan £1.3 billion of new cash will be injected into Northern Rock.
Half the cash will come from the consortium and half will be raised through a rights issue at 25 pence per share. The consortium will also inject Virgin Money, the Virgin financial services company, into the bank, with an implied valuation for Virgin Money of £250 million.
Northern Rock shares tumbled 18 per cent in early trading on the prospect the battered shares will be further diluted, but by 1045 GMT the stock had rebounded sharply and was up 29 per cent at 111p, valuing the company at £460 million.
Analysts attributed the rally to the possibility of a counter-bid and technical considerations, with short position holders forced to pay up to cover their holding.
A deal could yet face problems from shareholders.
Northern Rock's top two investors - hedge funds RAB Capital and SRM Global - have urged advisers to scrap the auction to prevent any firesale. SRM Global said an extraordinary shareholder meeting should be held to allow a vote on the sale of all or part of the bank.
Northern Rock said it did not consider such action "to be warranted or appropriate" but if necessary it would convene a meeting.
Shareholders were told they need to accept a deal or risk the bank going into administration, people familiar with the situation have said. Virgin is also not proposing a break-up.
Mr Branson, one of the world's highest-profile businessmen and estimated to be Britain's 11th richest person with a £3.1 billion fortune, said he is not planning any material cuts to Northern Rock's 6,000 staff and will keep its Newcastle base.
The bank will be renamed Virgin Money, keep a stock market listing, rebuild a deposit base and have financial flexibility. "We will achieve all this without additional burden on the taxpayer and we will offer shareholders the opportunity to participate in the future growth of the business," Mr Branson said in a letter to Northern Rock's customers.
The Virgin consortium will hold no more than 55 per cent of the enlarged group if the underwritten rights issue of shares is fully taken up.
Brian Pitman, who was chairman and chief executive of Lloyds TSB and regarded as the most influential British banker of the 1990s, would be chairman of the enlarged Virgin Money.
Jayne-Anne Gadhia, Virgin Money's chief executive, would have the same position at the enlarged group, advised by George Mathewson, former chairman and CEO of Royal Bank of Scotland and architect of deals including the NatWest takeover.