SIR RICHARD BRANSON’s Virgin Group is to improve the terms of its bid for Northern Rock in an effort to win support from the troubled bank’s key shareholders.

Branson’s move comes as the chancellor, Alistair Darling, is poised to announce a financing package put together by its adviser Goldman Sachs, the American investment bank, which dramatically increases the hopes of a private-sector rescue of the Newcastle-based bank.

This proposal involves turning into bonds, which would be guaranteed by the Treasury, some of the £24 billion owed by Northern Rock to the Bank of England. The package, which has been approved by prime minister Gordon Brown, is open to the three competing bids for Northern Rock – the Virgin consortium, another from Olivant, headed by Luqman Arnold, the former investment banker, and a third, an in-house proposal that has been put forward by the bank’s existing management.

Darling is expected to say tomorrow that he will give bidders two weeks to present their financing plans and their management teams. The government will also say that it reserves the right to nationalise Northern Rock should the offers prove unacceptable. If this is the case, shareholders will receive virtually nothing.

Virgin is aware that if its terms are not altered it will fail to secure investor support. Last week it met Philip Richards, chief executive of RAB Capital, one of Northern Rock’s two biggest investors. At that meeting Virgin was encouraged to improve its offer.

RAB and SRM Global – which between them account for 18% of the equity – still favour a rival bid for Northern Rock that has been proposed by Olivant, in which they would jointly put up between £200m and £250m in a rights issue. The bulk of this equity would come from SRM.

But Virgin, which intends to rename the bank under its own brand, is working hard to garner more support. It has indicated it is ready to take less equity in the bank if its bid is successful.

It is prepared to cut its proposed stake from 54% to 45%. This would allow investors to share more of the upside if there is a recovery in Northern Rock’s share price. In the past year the price has fallen 94% to 64½p.

Virgin and its consortium intend to inject £650m into the group. In addition to this, it is looking to tap the bank’s existing investors for a further £650m, and it has lined up Morgan Stanley to underwrite the rights issue.

Separately, Bryan Sanderson, the Northern Rock chairman, is expected to tell Brown that an in-house rescue would be the best outcome when the prime minister returns from a tour of China and India this week – accompanied by Branson.

Sanderson intends to scale down the size of the bank’s mortgage loan book quickly and run the bank as a much smaller company. This could be achieved by not renewing two-year fixed mortgages when they come up for renewal.

He is confident that he can raise at least £400m in a rights issue from investors and potentially as much as £750m. This is a huge sum when compared with the bank’s current market value of £319m.

Sanderson has strengthened his management team by recruiting Paul Thompson, a former investment banker, as his next chief executive.

The result of last week’s extraordinary meeting, which was convened by rebel investors, has encouraged the government that a private/public sector solution is possible.

Those present at the meeting say there was a realisation between shareholders and the bank that if they could not work together, the bank would be nationalised.

However, it is thought the advisers taking part in the deal, which include Blackstone and Merrill Lynch, are acutely aware of the delicate state of the financial markets. The three bidders still have to see the terms of the Goldman Sachs proposal and find out if it is adaptable to their own rescue schemes.

To help facilitate a deal, the government has also indicated any private-sector rescuer will not have to repay £10 billion of taxpayers’ loans immediately when it takes control.

Goldman is proposing that the bonds will be taken up by international investors. The intention is not to flood the market, but wait for credit markets to improve.

Sanderson has twice asked the Financial Services Authority, the City regulator, if Northern Rock’s shares are trading in a false market and should be suspended. On both occasions he was told they were not.

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