* Sale to institutions expected as early as September
* Govt cool on private equity/sovereign wealth interest
* Up to a quarter of govt stake could be sold in 1st round
* Sovereign wealth would need to offer premium - source
* "Accelerated bookbuild" could allow overnight sale
By Matt Scuffham
LONDON, July 12 (Reuters) - Britain will start selling itsshares in Lloyds Banking Group to pension funds andinsurers later this year, rejecting interest from private equityand sovereign wealth funds, industry and political sources said.
The government could sell up to a quarter of its 39 percentstake as early as September, the sources said, especially if thebank's first-half results, due in August, are well received.
Lloyds is expected to report a sharp rise in profit,which would raise hopes it can start paying dividends again in2014 and increase its attractiveness to investors.
Britain's Conservative-led coalition government sees a saleas a milestone in Britain's recovery from the 2008 crisis,during which taxpayers pumped a combined 66 billion pounds ($100billion) into Lloyds and Royal Bank of Scotland.
Sources with knowledge of government thinking said it wascool on the idea of a sale to private equity or sovereign wealthfunds, despite a number of parties expressing an interest, andwould require such investors to pay at least market price or apremium to guarantee value for taxpayers.
It wants to avoid the possibility of being seen at a laterdate to have sold off the assets too cheaply to overseas buyers.
The government wants the deal to be free of controversy inorder to garner maximum political benefit in the run-up to a2015 general election.
The sale will take the form of an "accelerated book build"in which up to 10 percent of shares in the bank would be sold tofinancial institutions over a period of one or two days, raisingbetween 4 billion pounds ($6.1 billion)and 5 billion.
A sale to institutions could be made at around a 5 percentdiscount to the market price, banking sources said.
The government would ideally like to follow the example ofDeutsche Bank, which raised 3 billion euros overnightin April, placing new shares at the previous day's close.
Officials are aware of the kind of backlash endured byBarclays, accused of offering too-generous terms inreturn for billions of pounds worth of investment from Qatar'ssovereign wealth fund during the 2008 financial crisis, a dealwhich has since come under scrutiny from UK authorities.
STRONG PERFORMANCE
That stacks the odds against sovereign wealth funds, fromwhich sources said the government has received tentativeapproaches, and a consortium led by ex-Standard Chartered boss Mervyn Davies, which includes U.S. private equityfirm Corsair Capital, in which Davies is a partner.
However, the government may seek "cornerstone" investors tounderwrite a placing, sweeping up any shares not bought by theinstitutions, banking sources said, possibly handing privateequity players a route into the sale process.
Osborne had always been keen to kick off the sale before thenext general election, but the strong performance of Lloydsshares, which were the top performer on the FTSE 100 last year and hit a 2-1/2-year high this week, has made anearlier sale possible.
In his annual address to London's financial elite lastmonth, Osborne said Britain was ready to start selling theshares.
Bankers now see September as a realistic date for kickingoff the sale, and UK Financial Investments (UKFI), which managesthe government's stakes in Lloyds and RBS, is in the process ofappointing advisors for a sale.
Shares in Lloyds are trading comfortably about the 61.2pence level which the government regards as its break-even.
The government had been expected to sell the shares in fourtranches, leaving a year's gap between each sale, but that couldbe accelerated if enough interest is evident. The U.S. offloaded$32 billion worth of shares in Citigroup in 2010.
Subsequent placings are likely to include sales to privateretail investors, which will require the bank to draw up aprospectus, taking a number of weeks.
Britain is also selling a majority stake in the Royal Mailpostal service on the stock market in what will be the country'sbiggest privatisation in over 20 years.
Britain's finance ministry, Lloyds and UKFI declined tocomment.
Lloyds (LLOY)