Big five put faith in Arnold to save Rock

The battle for Northern Rock took a dramatic turn today when one suitor put forward a fresh rescue package while another walked away.

Olivant, the investment group run by former Abbey National boss Luqman Arnold, tabled a proposal to rival that of Sir Richard Branson's Virgin Group, which has been granted "preferred bidder" status.

The Olivant offer included a promise to repay immediately up to £15 billion of the emergency funding Northern Rock was forced to take from the Bank of England. It will clear the remainder of the £25 billion by the end of 2009. Virgin has offered to repay £11 billion immediately and the rest over the next three years.

JC Flowers, the US private-equity firm headed by Christopher Flowers, last night withdrew fromfrom the auction after deciding it could not make an offer that satisfied the Government and gave value to shareholders. "We don't think there is any shareholder value," a source said.

Arnold was more upbeat, however, as his proposal won the backing of five major shareholders - thought to include hedge funds RAB Capital and SRM Global which have vigorously opposed the Virgin offer, accusing Branson of trying to get Rock on the cheap.

Olivant proposes to take a 15% stake in the company and parachute in its own management team to oversee the turnaround, headed by Arnold as executive chairman.

Under the plan, Olivant said it will raise between £600 million and £800 million via a rights issue, including £150 million of its own money. It has the support of five shareholders who represent 23% of Rock and have agreed to underwrite £440 million of the issue "at or around the current market price". Rock shares rose 0.1p to 103.1p today.

Arnold said: "The main thing is that Virgin and others want to take over Northern Rock. We do not. What we are proposing is to join the company as significant minority shareholders and a management team. Shareholders think this is a better deal."

The Olivant offer is attractive because the turnaround can start straight away. A full-blown takeover is likely to take months to finalise.

Northern Rock last night finally admitted it has borrowed £25 billion from the taxpayer since it plunged into crisis. The stricken bank put an end to guesswork after weeks of speculation as the City has been forced to estimate its loans from the Bank of England.

Arnold today said: "It is time for all stakeholders to work together to ensure prompt and full repayment of the Bank of England facility and to set Northern

Rock back on course for a successful and independent future.

"We believe this proposal satisfies the requirement of all stakeholders, including the Tripartite Authorities' principles for assessing Northern Rock proposals, whilst confirming the broad and constructive support from shareholders."