* Sale to institutions expected as early as September
* Govt cool on private equity/sovereign wealth interest
* Up to a quarter of govt stake could be sold in 1st round
* Sovereign wealth would need to offer premium - source
* "Accelerated bookbuild" could allow overnight sale
By Matt Scuffham
LONDON, July 12 Britain will start selling its
shares in Lloyds Banking Group to pension funds and
insurers later this year, rejecting interest from private equity
and sovereign wealth funds, industry and political sources said.
The government could sell up to a quarter of its 39 percent
stake as early as September, the sources said, especially if the
bank's first-half results, due in August, are well received.
Lloyds is expected to report a sharp rise in profit,
which would raise hopes it can start paying dividends again in
2014 and increase its attractiveness to investors.
Britain's Conservative-led coalition government sees a sale
as a milestone in Britain's recovery from the 2008 crisis,
during which taxpayers pumped a combined 66 billion pounds ($100
billion) into Lloyds and Royal Bank of Scotland.
Sources with knowledge of government thinking said it was
cool on the idea of a sale to private equity or sovereign wealth
funds, despite a number of parties expressing an interest, and
would require such investors to pay at least market price or a
premium to guarantee value for taxpayers.
It wants to avoid the possibility of being seen at a later
date to have sold off the assets too cheaply to overseas buyers.
The government wants the deal to be free of controversy in
order to garner maximum political benefit in the run-up to a
2015 general election.
The sale will take the form of an "accelerated book build"
in which up to 10 percent of shares in the bank would be sold to
financial institutions over a period of one or two days, raising
between 4 billion pounds ($6.1 billion)and 5 billion.
A sale to institutions could be made at around a 5 percent
discount to the market price, banking sources said.
The government would ideally like to follow the example of
Deutsche Bank, which raised 3 billion euros overnight
in April, placing new shares at the previous day's close.
Officials are aware of the kind of backlash endured by
Barclays, accused of offering too-generous terms in
return for billions of pounds worth of investment from Qatar's
sovereign wealth fund during the 2008 financial crisis, a deal
which has since come under scrutiny from UK authorities.
That stacks the odds against sovereign wealth funds, from
which sources said the government has received tentative
approaches, and a consortium led by ex-Standard Chartered
boss Mervyn Davies, which includes U.S. private equity
firm Corsair Capital, in which Davies is a partner.
However, the government may seek "cornerstone" investors to
underwrite a placing, sweeping up any shares not bought by the
institutions, banking sources said, possibly handing private
equity players a route into the sale process.
Osborne had always been keen to kick off the sale before the
next general election, but the strong performance of Lloyds
shares, which were the top performer on the FTSE 100
last year and hit a 2-1/2-year high this week, has made an
earlier sale possible.
In his annual address to London's financial elite last
month, Osborne said Britain was ready to start selling the
Bankers now see September as a realistic date for kicking
off the sale, and UK Financial Investments (UKFI), which manages
the government's stakes in Lloyds and RBS, is in the process of
appointing advisors for a sale.
Shares in Lloyds are trading comfortably about the 61.2
pence level which the government regards as its break-even.
The government had been expected to sell the shares in four
tranches, leaving a year's gap between each sale, but that could
be accelerated if enough interest is evident. The U.S. offloaded
$32 billion worth of shares in Citigroup in 2010.
Subsequent placings are likely to include sales to private
retail investors, which will require the bank to draw up a
prospectus, taking a number of weeks.
Britain is also selling a majority stake in the Royal Mail
postal service on the stock market in what will be the country's
biggest privatisation in over 20 years.
Britain's finance ministry, Lloyds and UKFI declined to