February 17, 2014 / 4:50 PM / 4 years ago

Britain to target institutions in next Lloyds share sale-sources

* Up to a quarter of remaining stake could be sold - sources

* Dividend blow may put retail offer on backburner - sources

* Government wants to sell remaining shares by 2015 election

* Scottish independence vote may disrupt timing - sources

By Matt Scuffham

LONDON, Feb 17 (Reuters) - Britain wants to sell the vast majority of its next Lloyds share offering in March or April to institutions and may offer a small number to retail investors despite uncertainty over its dividend, bank and political sources said.

Retail investors favour stocks that pay dividends because of the near-term income they provide, whereas institutional investors are usually prepared to take a longer view.

Lloyds was rescued through a 20.5 billion pound ($34 billion) government bailout during the 2008 financial crisis, leaving taxpayers with a 39-percent stake.

Having sold a 6 percent stake last September, the government wants to sell the remainder before the next election in 2015 and Finance Minister George Osborne has said some shares will be offered to the public “when the time is right”.

The Treasury and advisory group UK Financial Investments (UKFI) are discussing whether to include a retail component in the next sale but some officials believe they should wait until Lloyds dividend prospects are clearer. Its failure to pay a 2013 dividend disappointed some analysts and investors.

The bank said last week it would approach Britain’s financial regulator in the second half of 2014 about starting to pay dividends again at a modest level, meaning investors would not receive a payout for another 12 months.

UKFI, which manages the government’s stake, will be free to sell more shares once the bank’s annual report has been published in early March.

Banking and political sources say the most likely outcome is a sale to institutions such as pension funds and insurers followed by a larger offering including retail investors later in the year or in early 2015. The Treasury and UKFI have taken no final decision on various options under consideration.

One of the sources told Reuters the government could look to sell up to a quarter of its remaining shares in the sale to institutions, potentially raising more than 4.5 billion pounds, compared with the 3.2 billion raised in the first sale.

Other complications may arise if Scotland votes on Sept. 18 to become independent from England. Lloyds, owner of Bank of Scotland, is registered in Edinburgh and a “yes” vote would have significant implications for the bank, including possibly moving its registered headquarters to London.

In the weeks leading up to that vote, the government may not be able to sell any shares because of uncertainty over the bank’s future, the sources said.

That potentially rules out selling a large chunk in September, traditionally a ripe spot for share sales with investors back at their desks after the summer holidays and ahead of the closed period before third-quarter results.

However the sale is structured it will need to be handled with extra care. In December, Britain’s public spending watchdog said taxpayers lost at least 230 million pounds on the first sale, contradicting Osborne’s assertion at the time that the shares had been sold at a profit.

Though the shares were sold at 75 pence - above the price at which they were bought - the National Audit Office calculated that they would need to have been sold at 80 pence for the government to break even, taking account of the cost of borrowing the money to buy the shares.

Shares in Lloyds closed 1.6 percent higher at 81.8 pence on Monday. Any sale would need to be pitched at a discount to the market price.

Lloyds, UKFI and the Treasury declined to comment.

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