Sir Richard Branson’s Virgin Group and his partners were poised last night to win control of Northern Rock, the stricken mortgage lender.

It is expected that the Virgin-led consortium will be named as preferred bidder this morning, although final talks were continuing last night.

The plan proposed will mean that Virgin Money, the group’s personal finance operation, will merge with Northern Rock. Cash will be pumped into Virgin Money, valuing it at around £250 million, and in return the Virgin consortium will take a stake of between 50 per cent and 60 per cent.

That is expected to be followed by a deeply discounted rights issue – likely to be controversial with existing shareholders – because it will value the new shares at somewhere between 20p and 40p each. Northern Rock ended last week trading at 86p, valuing it at £362 million.

Formal approval by the Treasury was granted yesterday evening, after a weekend of talks, during which the number of bidders was gradually whittled down. Virgin’s bid includes an immediate repayment of £11 billion of the £25 billion that the bank owes to the Bank of England.

The Virgin consortium also includes Wilbur Ross, the American distressed debt investor, AIG, the insurance giant, Toscafund, a hedge fund, and First Eastern Investment Group, a Hong Kong-based finance house It is backed by RBS and Citigroup. Sir Brian Pitman, the former Lloyds TSB chief executive, is expected to become the Rock’s chairman.

The prospect of a discounted rights issue prompted concerns from small investors yesterday, represented by the Northern Rock Small Shareholders’ Association. A letter from its honorary president Lord Stevens of Kirkwhelpington, the former Metropolitan Police Commissioner, said that the group would oppose “a sale of the company as a whole or piecemeal, or any move such as administration or nationalisation, which would expropriate the shareholders’ stake or so dilute it as to be the equivalent”.

Northern Rock has been under pressure to make progress in the auction from the Government. Sources said that there was political concern that the longer that the Northern Rock saga continued, the further the company’s shares were likely to fall and the more the Opposition would be able to pursue the issue. Government officials must determine which bid offers the best prospect of the Bank of England recovering the money that it has lent Northern Rock.

The shortlist of bidders was being drawn up by the bank’s advisory team of Merrill Lynch, Citigroup and Blackstone, after a series of weekend meetings and conference calls. Earlier in the day the race had come down to two main bidders, with JC Flowers, the private equity group, providing the opposition to the Virgin consortium. Virgin emerged as the frontrunner in the early evening.

A third contender, Olivant, the investment firm run by Luqman Arnold, the former chief executive of Abbey National, remained on the margins of the process yesterday as he and colleagues tried to raise further finance. Although Olivant succeeded in winning backing from unnamed banks and promised to commit £450 million of equity from itself and two partners – the Rock shareholders RAB Capital and SRM – it was not enough to win over Northern Rock’s board.

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