As much as half of the government's £18bn stake in Lloyds Banking Group would be sold to retail investors in a provisional scenario being sketched out by officials as they step up efforts to exit the bank.
The sell-off could start as early as September, with a 5-10 per cent stake in Lloyds being placed with institutional investors at a small discount to the share price.
People involved in the process expect a second institutional placing early next year, with a retail tranche to follow, paving the way for the government to offload its 39 per cent stake completely by the end of 2014, assuming markets remain stable.
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Officials stressed that there was no planned timetable or structure for the sale of the Lloyds stake and that the primary driver was generating the best value for the public.
However, they noted that it would be politically advantageous to offer retail investors the chance to benefit from a further rise in the share price of Lloyds, which was rescued by the government in the 2008 financial crisis.
Given the complexities and costs involved in a retail share offering, bankers said it would have to be significant – in the range of 5-10 billion pounds – to be worthwhile. This could be done in several stages to smooth out share price movements.
The retail element is likely to be launched towards the end of the sell-off process, giving the part-nationalized bank more time to return to profit and restart a dividend, expected by mid-2014.
The retail tranche is likely to be structured as a straightforward offering on a par with the 1980s BT and British Gas privatizations, in preference to the "free share" giveaway touted by some advisers.
It would follow the government's plan, announced this week, to offer the public the chance to buy shares in Royal Mail ahead of a potential stock market flotation this autumn.
The government is considering a range of options for Lloyds, however, and bankers said the final size of any retail sell-off would depend on appetite for earlier institutional placings, as well as market conditions.
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Lloyds' share price has risen more than 40 per cent in the past three months to 66.25 pence, surpassing the 61 pence price at which they are valued in the government's accounts.
The government asked advisers to submit proposals for selling its stake in Lloyds, as well as its 82 per cent holding in Royal Bank of Scotland, by the start of this week. Two banks are set to be selected from groups such as Credit Suisse, Deutsche Bank, UBS and Bank of America Merrill Lynch, by the end of this month.
The offering would further boost private investor ownership of Lloyds, already one of the most widely held UK stocks. HBOS, rescued by Lloyds in 2008, brought with it a shareholder register dominated by retail investors who had kept their shares after the demutualization of Halifax.