Some of the City’s leading investment institutions are exploring a takeover bid for more than 300 bank branches which Royal Bank of Scotland (LSE: RBS.L - news) (RBS) is under orders from Brussels to sell.
I have learnt that major investor groups including Schroders (LSE: SDR.L - news) and Threadneedle Investments have been approached about participating in a bid proposal being put together by Canaccord Genuity, the City broking firm. Fiske, a smaller broker, is also understood to be working on the project.
The news could add fresh momentum to an auction that looked to have lost traction after Nationwide, Britain's biggest building society, declared that it had no interest in acquiring the 316 branches.
RBS had agreed to sell the business to Santander UK, the Spanish-owned lender, for about £1.6bn, but the deal fell apart amid a dispute about the complexity of the IT systems associated with the branches.
The structure of a vehicle that would be used by a City consortium to acquire the branches is unclear. One option being considered would be to launch a form of accelerated initial public offering, which would involve creating a shell company to buy the RBS operations and sell shares to the institutions over a rapid timetable.
None of the institutions approached about the deal has formally committed to participating yet, but people close to RBS confirmed that the putative consortium had been given access to a data room allowing it to examine financial information about the branch network.
One of the difficulties with selling the branches to a City consortium would be that the network comes with little by way of infrastructure and so would require significant investment to develop into a standalone bank.
According to figures from RBS, the franchise, which carries the Williams & Glyn’s name, consists of almost £19bn in assets, 250,000 small business customers, 1.8 million retail customers and about 5,000 employees. In the first half of 2012, it generated an annualised operating profit of £372m.
A number of senior City figures are under consideration as a potential chairman of the business if the institutions' bid progresses.
It is conceivable that the institutional investors could join forces with a private equity bidder for the branches. Two buyout firms, Apollo Management and JC Flowers, have submitted a joint offer, while Corsair Capital, whose advisers include the former trade minister, Lord Davies, is also interested.
Virgin Money, which bought Northern Rock from the Government just over a year ago, has signalled that it might bid but the level of its interest is unclear.
Any buyer is unlikely, however, to pay more than half the £1.6bn offered by Santander (Madrid: SAN.MC - news) , a price which itself had been reduced during two years of talks between RBS and the Spanish-owned bank.
RBS has been set a deadline to sell the business by the end of this year by the European Commission, but that timetable is unlikely to be met.
Executives at the bank would prefer to sell to an existing competitor in order to shorten the sale process but are likely to have to ask Brussels for more time.
The Office of Fair Trading today spared the banking industry from a full competition inquiry into the sector, but warned that the personal current account market required significant change and that it plans to revisit the issue in two years' time.
RBS declined to comment on the progress of the auction, which it has codenamed "Project Rainbow".