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RBS Considers 'Hybrid' Branches Sale

(c) Sky News 2013

Royal Bank of Scotland (LSE: RBS.L - news) (RBS) is mulling a hybrid sale of more than 300 branches to private equity firms and institutional investors in an attempt to jump-start the flagging auction.

The state-backed lender is drawing up proposals to sell a minority stake in the branch network to an outside investor before attempting to list the business on the stock market, according to insiders.

Under the plan, one or more of the private equity firms currently showing an interest in acquiring the branches - which include Apollo Management and JC Flowers - could buy a stake of around 20% in the business.

The idea could offer RBS greater certainty that it can achieve a full sale of the branch network, which it is supposed to have completed by the end of the year under a deal with the European Commission.

Bidders expect to be told about RBS's preferred option for disposing of the network at around the time the bank reports full-year results next week.

The network, which RBS has codenamed Project Rainbow, has to be sold as part of the bank's state aid package that saw it rescued with £45bn of taxpayers' money in 2008.

It comprises RBS branches in England and a handful of NatWest branches in Scotland.

Sky News revealed last month that a group of City institutions including Schroders (LSE: SDR.L - news) and Threadneedle Investments were exploring a bid for the branches.

That project would not be incompatible with the sale of an initial minority stake to one or more private equity groups, people familiar with the situation said.

RBS had lined up the sale of the Rainbow business to Santander UK, but that deal collapsed last autumn amid recriminations about the state of the branches' associated IT systems.

The sale of the branch network is one of many challenges facing RBS and its chief executive, Stephen Hester.

David Cameron, the Prime Minister, told newspapers today that he would like the bank to accelerate reforms as the Government prepares to sell its stake in the coming years.

RBS executives interpreted that as a signal that it should shrink its investment bank further, although one pointed out that it had already shed thousands of jobs and reduced the size of its balance sheet by hundreds of billions of pounds.

RBS declined to comment.