* Santander pulled out of deal late Friday
* RBS has received approach from Virgin, others - sources
* Private equity firm J.C. Flowers may enter fray - source
* Any deal seen below 1.65 bln stg struck with Santander
* EU says will not ease up on RBS's restructuring rules
By Matt Scuffham and Steve Slater
LONDON, Oct 15 Virgin Money and U.S. private
equity firm J.C. Flowers are leading a small field of potential
suitors to buy 316 branches from Royal Bank of Scotland,
after Spain's Santander pulled out of a deal on Friday.
The collapse of the sale was a major blow to RBS, coming at
a critical juncture in its recovery from a 2008 state bailout,
and it is now likely to have to accept a price well under the
1.65 billion pounds ($2.7 billion) agreed with Santander.
Shares in RBS, 82 percent owned by the British taxpayer,
were down 1 percent in Monday morning trade, while Santander's
were up 0.1 percent.
"RBS now has only 13 months to find another buyer or float
the business. Either way, we expect the revised price to be
significantly lower," said Espirito Santo analyst Shailesh
RBS was ordered by European authorities to sell the
branches, which have 1.8 million customers and accounted for
about 10 percent of group operating profit in the first half of
2012, as a condition of its government rescue.
The setback could push back the time frame for taxpayers to
see a return on the 45 billion pounds Britain pumped into the
bank to keep it afloat.
Santander's retreat will save it some capital at a time a
sovereign debt crisis is putting the financial position of all
Spanish banks under scrutiny, and will avoid it increasing its
exposure to a British economy languishing in recession.
"The price set in Aug 2010 looks somewhat expensive now, the
UK macro environment doesn't look appealing in the medium term
and capital preservation ranks as a higher priority," Raikundlia
Sources close to the matter told Reuters on Saturday RBS had
received interest from businessman Richard Branson's Virgin
Money and others since Friday. Virgin, which last year bought
Northern Rock, lost out to Santander in the original auction.
J.C. Flowers is also interested in looking at the branches,
a person familiar with the matter told Reuters on Monday.
However, the U.S. private equity firm, headed by entrepreneur
Christopher Flowers, wants reassurances on the quality of assets
and IT issues if it is to press ahead with a bid.
Flowers, who made his name at Goldman Sachs in the
1980s and 1990s, bid for the Northern Rock business before it
was nationalised in 2009.
Although private equity has a chequered history of investing
in banks, Flowers was a winner from a bold investment in 2000 in
Japan's Long Term Credit Bank - renamed Shinsei, or rebirth.
J.C. Flowers is keen to expand in UK financial services to
add to its small building society Kent Reliance.
Despite the interest of Virgin and J.C. Flowers, RBS could
still face a tough task to clinch a sale by a 2013 deadline,
with the list of obvious rival suitors a short one.
NBNK, the venture set up to buy UK banking assets by former
Lloyd's of London insurance head Peter Levene, is being wound up
after losing out to the Co-op in a battle to buy more than 600
branches from Lloyds Banking Group, and the chances of
it reversing that process looked slim after its former head Gary
Hoffman was on Monday named CEO of Hastings Insurance.
Co-op's preoccupation with integrating the branches it
purchased from Lloyds makes it an unlikely bidder. Metro Bank
said on Sunday it was focused on organic growth, while Tesco
Bank said it had no interest in buying branch networks.
Sweden's Handelsbanken, which is expanding rapidly
in Britain, declined to say if it was interested in the
branches, but has so far focused on organic growth in the UK.
Australia's National Australia Bank was involved in
the original auction but has since begun a retreat from the UK
market, shutting several branches and cutting 1,400 jobs.
If a credible bidder fails to emerge, RBS could consider a
stock market listing or ask EU regulators to extend the deadline
for selling the branches.
Whichever option it pursues, RBS will likely have to sell at
a big discount to the 1.3-billion-pound value of the branches on
its books. RBS shares are trading at around 0.6 times book
value. If that metric was applied to the branches, it would give
them a value of about 780 million pounds.
RBS Chairman Philip Hampton said on Saturday the bank could
ask the EU if it can keep the branches.
However, the European Commission said on Monday it was not
going to ease up on RBS' restructuring and that, if RBS wanted
to keep the branches, it would have to give up something equally
valuable. The Commission also said it had not received any
request from UK authorities in relation to RBS.
RBS received a welcome boost last week when it successfully
completed the initial public offering of its insurance arm
Direct Line and later this month could exit a costly
government insurance scheme.
But those milestones risk being overshadowed because it is
expected to be next in line to be hit with a big fine for the
manipulation of Libor global interest rates.