Flowers, Virgin front-runners for Northern Rock

LONDON, Nov 25 (Reuters) Richard Branson's Virgin Group and U.S. buyout firm J.C. Flowers are the two front-runners to buy ailing British bank Northern Rock, people familiar with situation said on Sunday, but shareholders are unlikely to get much from either.

A consortium led by Virgin would launch a deeply discounted share placing for Northern Rock that would value its shares at between 20 pence and 40 pence each, according to the Sunday Times newspaper. The shares closed at 85.9p on Friday.

The J.C. Flowers proposal includes a ''nominal'' offer for the shares, Reuters reported earlier this week.

The Virgin and Flowers proposals are top of the list of offers being considered by the Northern Rock board, its advisers and Britain's Treasury, and a preferred bidder could be announced in the next three days, people familiar with the situation said.

The Sunday Telegraph said Warren Buffett, the renowned U.S.

investor, has held talks with three of the potential bidders for Northern Rock with a view to joining one of the consortiums.

Northern Rock, Virgin and J.C. Flowers all declined to comment.

Northern Rock has been engulfed in crisis since it was unable to raise funds in financial markets and the Bank of England stepped in to offer it emergency loans in mid-September.

It is estimated to have borrowed at least 25 billion pounds (.4 billion) from the Bank of England, leaving refinancing of the loan a key issue for potential buyers as turmoil in financial markets could make it an expensive and difficult task.

HEDGE FUNDS Another sticking point could be calls by the bank's top two shareholders, hedge funds RAB Capital and SRM Global, to scrap the auction.

SRM said on Friday an extraordinary general meeting should be held to amend Northern Rock's articles of association.

Shareholders should be allowed to vote on the sale of all or part of the bank to prevent any bidders purchasing assets at ''fire sale prices'', it said.

RAB Capital has also called for time to revive Northern Rock's fortunes. Both shareholders are reported to support a proposal from investment company Olivant, which would parachute in new management and just take a minority stake.

Northern Rock shares have continued to fall during the auction process as it appears likely that bidders will offer little to shareholders. Shares have plunged more than 90 percent this year and its market value is now just 362 million pounds.

Olivant is backed by former Abbey National chief executive Luqman Arnold. Other interested suitors include Cerberus, another U.S. buyout firm, in tandem with U.S. finance firm GMAC.

Buffett, known as ''the Sage of Omaha'' for his successful investment record, has discussed a deal with J.C. Flowers, Cerberus and a new consortium including U.S. private equity firms Olympus Partners and Five Mile Capital, the Sunday Telegraph said.

REUTERS BJR KP1807