Mon Oct 15, 2012 6:26am EDT
* Santander pulled out of deal late Friday
* RBS has received approach from Virgin, others - sources
* U.S. private equity firm JC Flowers may enter fray - source
* RBS shares down 0.5 pct; Santander up 0.1 pct
By Matt Scuffham and Steve Slater
LONDON, Oct 15 (Reuters) - 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 Raikundlia, who viewed the breakdown of the deal as good news for Santander as it grapples with Spain's sovereign debt crisis.
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 said.
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.
JC 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.
DEADLINE
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 an early winner from a bold and risky investment in 2000 in Japan's Long Term Credit Bank - renamed Shinsei, or rebirth - which has been hailed as one of the greatest private equity deals of all time.
Flowers is keen to expand in UK financial services to add to its small building society Kent Reliance.
But 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 as a back up option.
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 the bank is expected to be next in line to be hit with a big fine for the manipulation of Libor global interest rates.
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