Northern Rock soars as ex-Abbey boss plans swoop

Arnold's investment company Olivant plans to take a minority stake in Northern Rock and introduce a core team led by him to run the battered mortgage lender, it said in a statement on Monday, confirming weekend newspaper reports.

Under the deal to be put to Northern Rock's board, Arnold -- also the former head of investment bank UBS -- is expected to become chief executive, replacing Adam Applegarth.

Arnold's proposal, which is not an offer for Northern Rock's shares, comes just days ahead of a Friday deadline for bids for Britain's biggest casualty of the credit crunch.

His deal, advised by Lazard and the only one so far which would not entail a sale, will compete with offers from suitors including U.S. buyout firm JC Flowers and a consortium led by Richard Branson's Virgin Group. Wall Street powerhouse Cerberus is also interested, sources familiar with the deal have said.

We welcome all interest, a Northern Rock spokesman said. There is a formal process in place and anyone who is interested is invited and encouraged to participate in that process.

Olivant declined to comment on the size of the minority stake, but the group could take up to 20 percent, according to the Sunday Times, a stake worth some 130 million pounds.

The Sunday Telegraph reported Arnold has held informal talks with Northern Rock Chairman Bryan Sanderson and that Arnold's request for exclusive talks was denied.

Shares in Northern Rock were up 5.4 percent at 1009 GMT, trading at 152.8p, as traders said the move could be good news for shareholders fearful that a cut-price sale could leave them even further out of pocket.

Luqman Arnold is being perceived as a knight in shining armour, one London trader said.

SHOW ME THE MONEY

Analysts said Arnold's move underlined the health of Northern Rock's portfolio, but said Olivant, along with any other suitor or potential partner for Northern Rock, will first need to solve the critical issue of how to fund the bank's operations, with the UK government reluctant to extend its largesse beyond the current deadline of next February.

Since it first turned to the Bank of England for emergency funds two months ago, Northern Rock has borrowed around 23 billion pounds.

We would expect to see any proposals based on this plan to include detailed explanations of how funding and lending will rebalance to create a viable business that is focused more on returns than growth, Landsbanki analysts said in a note.

Even if the facilities were to remain open... they would remain at a punitive rate of interest and would need to be replaced to allow a viable business model to be developed.

Some five years ago Arnold was brought in to rescue Abbey, Britain's fifth-largest bank, after problems with its wholesale banking arm. As chief executive, he helped the bank stabilise its business but it was swiftly sold to Spanish bank Santander. (Reporting by Clara Ferreira-Marques, Editing by Mark Potter/Rory Channing)