Northern Rock PLC proposed business plan of survival

British investment group Olivant offered a detailed rescue plan for mortgage lender Northern Rock PLC.

Photo: Northern Rock PLC proposed business plan of survival

The offer from Olivant, which includes immediately repaying up to 15 billion pounds (US$30.5 billion; 20.96 billion EUR) of the government funds propping up Northern Rock, could be a strong contender to the current preferred bid from Richard Branson's Virgin Group.

Olivant chief Luqman Arnold, a buyout veteran, said he was confident his proposal would win favor with the government and shareholders.

"The government has indicated its complete openness to any proposals that address the issues and the needs," he said. "Our proposal is simpler, smoother and quicker."

Shares in Northern Rock jumped 7.4 percent to close at 110.6 pence (US$2.24; 1.53 EUR) on the London Stock Exchange.

Olivant plans to take over management of the mortgage lender in return for a 15 percent stake, developing the company as "a strong, independent brand" under the Northern Rock name. The outstanding value of a series of loans from the Bank of England would be repaid by 2009, it added.

The Virgin consortium proposes to re-brand Northern Rock as part of the Virgin Money business and take a 55 percent stake in the bank. It has said it would repay 11 billion pounds (15.3 billion EUR; US$22.7 billion) of the Bank of England debt immediately.

Olivant outlined its offer as JC Flowers reportedly pulled out of contention. The U.S. buyout firm sent letters to the Treasury notifying officials of its position, according to the Financial Times and Daily Telegraph.

Flowers did not immediately return a call.

Keefe, Bruyette & Woods analysts said in a note that the proposal looks more attractive than Virgin's, but Collins Stewart analyst Alex Potter said that the Olivant approach was short on detail.

Olivant's plan calls for a Northern Rock to raise between 600 million pounds to 800 million pounds (US$1.22 billion to US$1.62 billion; 833 million EUR to 1.11 billion EUR) in equity capital through a transferable rights issue and an equity subscription by Olivant.

The rights issue would raise between 450 million pounds and 650 million pounds (US$915.2 million and US$1.3 billion; 628.8 million EUR and 890 million EUR) at or around the prevailing market price at the time of subscription, while the equity subscription of 150 million pounds (US$305 million; 209 million EUR) would be made by Olivant on completion of the rights issue and at a price equal to the rights issue subscription price.

Arnold would join the Northern Rock board as executive chairman until full repayment of the Bank of England facility has been completed, while Kirk Stephenson, chief operating officer of Olivant, would become a non-executive director.

The European Commission gave the bidding process some fresh oxygen earlier this week by clearing the state aid that kept Northern Rock afloat after it fell victim to the global credit crisis. After declining to reveal specifics for weeks, Northern Rock said on Thursday that it had so far borrowed 25 billion pounds (US$50.8 billion; 34.9 billion EUR).

Northern Rock ran into trouble in September when short-term money markets dried up following the collapse of the U.S. subprime mortgage market. Heavily reliant on funding from those markets, Northern Rock approached the Bank of England for an emergency loan.

As spooked customers made a run on the bank to retrieve their savings, the government also announced it would guarantee all personal funds held by the lender up to 35,000 pounds (US$70,900; 48,100 EUR).

That package of loans and deposit guarantees needed approval from the EU, which allows certain forms of emergency aid for a limited period of up to six months.

The EU said on Wednesday that the assistance to that point was legal, but withheld any decision on future aid.