RBS To Narrow Down 5 Branch Bids In Weeks; Deal In 2nd Half-Sources

Royal Bank of Scotland Group PLC (RBS) will narrow down bidders for its 318 U.K. branches within the next few weeks, and after that it will allow a smaller group to conduct due diligence in a deal currently valued at up to GBP2 billion, people familiar with the situation said Wednesday.

Five companies have put down initial bids for the branches at Tuesday's deadline, the people said. They were Spain's Banco Santander SA (STD) and Banco Bilbao Vizcaya Argentaria SA (BBVA), Australia's National Australia Bank Ltd. (NAB.AU), Richard Branson's privately held Virgin Money and private equity firm JC Flowers.

Bids came in between GBP1.5 billion and GBP2 billion, people added, with Santander's among the highest.

Once the due-diligence process ends, companies will go through a second round of bidding, after which an exclusivity agreement will be signed.

The deal is expected to close in the second half of the year, although the actual transfer of operations probably won't take place until 2011.

RBS, 84%-government owned, is selling branches in England and Wales, along with NatWest branches in Scotland, and the accounts of some SME customers across the U.K., under European Union requirements.

Combined, the branches have GBP23.6 billion in assets and 6,000 employees.

The bank received the largest state aid in the world following its near collapse during the financial crisis in 2008. The EU has ordered it to cut market shares in some segments to make sure the bank isn't at a competitive advantage to peers that stayed independent.

The sale of the branches, however, poses a difficult separation process for RBS, which is undergoing a wider restructuring of its operations.

Along with the bid amounts, potential buyers are also expected to outline integration benefits and plans for the branches' services agreements in presentations next week.

In addition to the sale price, the winner will be required almost immediately to inject around GBP3 billion in the business to cover an emergency funding line from the Bank of England that will be withdrawn.

A further GBP2 billion in capital will be needed to support RBS's loan book.

Santander is widely considered to be in the best position to take home the prize, since it would have the easiest time absorbing the branches to its network of around 1,300. Because it has infrastructure already in place, it is also likely to offer the highest bid through the entire process.

The bank entered the U.K. market in 2004 with the acquisition of Abbey National PLC.

Australia's NAB--which owns Clydesdale and Yorkshire banks in the U.K.--could also be a strong competitor for the assets. The bank entered the U.K. market in 1987, allowing it to take advantage of two decades largely characterized by strong growth.

A bid by peer BBVA, Spain's No. 2 lender by assets, would mark a shift in strategy for a bank that in recent years has focused on expanding in the U.S. and Asia. It is already a big player in Latin America, but in the U.K. it currently has only three branches.

Virgin Money, meanwhile, is seen as a strong contender, especially for those who believe the U.K. government will have a say in the process, potentially leading RBS to choose a fresh new player in a sector that has become the face of the recession.

The company announced Tuesday that veteran U.S. investor Wilbur Ross has bought a 21% stake in the company for GBP100 million to support its bid for RBS' branches.

Virgin Money, which earlier this year entered the U.K. retail banking market by acquiring small Church House Trust, will also get up to GBP500 million from Ross for asset bids, according to a person familiar with the situation.

Most of the bidders are also eyeing assets that will be put for sale by 41%-government owned Lloyds Banking Group PLC (LYG) and fully nationalized Northern Rock PLC.

RBS is eager to finish the EU-ordered sales fast to move on with its wider restructuring, although it has been given four years to do so. A successful completion of the branch sale and other disposals is seen by analysts as a major driver for the share price.

Shares of the bank were flat at 45 pence at 1120 GMT.

Wednesday is the deadline for a first-round of bids for another asset being put for sale. The bank's Global Merchant Services business, which is expected to fetch about GBP3 billion, is likely to receive many bids from private equity firms in Europe and the U.S., people familiar with the situation said.

-By Patricia Kowsmann and Margot Patrick, Dow Jones Newswires. Tel +44(0)207-842-9295, patricia.kowsmann@dowjones.com

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