By Matt Scuffham
LONDON (Reuters) - Shares in Lloyds Banking Group (LSE:LLOY) hit a 3-year high on Tuesday as expectations mounted that the British government could start selling off its 39 percent shareholding this month.
Three sources with knowledge of the government's thinking said it was considering selling around a quarter of its 39 percent stake - worth about 5 billion pounds - if it could do so above 73.6 pence a share, the average price at which it bought them.
One of the sources said a sale could come in the next 7 to 10 days.
Britain's Conservative-led coalition government considers such a sale as a milestone in Britain's recovery from the 2008 financial crisis, during which taxpayers pumped a combined 66 billion pounds into Lloyds and Royal Bank of Scotland (RBS.L).
Shares in Lloyds, which have more than doubled in value over the last 12 months, were trading at 78.6 pence at 1310 GMT, up 2.2 percent.
"From the level of noise, it's imminent," said one senior UK equities fund manager specialising in financial stocks. "Index demand should take around a quarter of the offer and I'd expect it will be well supported by institutional investors."
The shares will be sold via a placing to pension funds and insurers after the Treasury turned down private equity and sovereign wealth funds, according to the sources close to government.
The sources said the sale would be made at a "narrow discount" to the current share price and take the form of an "accelerated book build" over a period of 24 hours.
The government would ideally like to follow the example of Deutsche Bank (DBKGn.DE), which raised 3 billion euros overnight in April by placing new shares at the previous day's close.
UK Financial Investments, which manages the government's stakes in Lloyds and Royal Bank of Scotland (RBS.L), is reviewing the situation daily, sources have said, and will make a recommendation to Britain's finance ministry when to commence a sale. The final decision will be made by UK Finance Minister George Osborne.
"The government has consistently said we have no set timetable or target share price for beginning the return of Lloyds to the private sector, and ensuring value for money for the taxpayer will continue to be the overriding consideration for any sale," the Treasury said on Tuesday.
Osborne may look to make the sale before the Conservative's annual party conference begins on Sept 29, one of the sources said. Any sale needs to be made by mid-to-late October, another source said, before Lloyds enters a closed period ahead of its third-quarter results on October 29.
Another factor being considered is how the shares will perform after the government has sold its stake. One source close to the government said it was wary about pressing the button on a sale when the shares could have further to rise.
"The stock has traded well but a lot of people still see some upside too," the source said.
Morgan Stanley and Bernstein last week upgraded their target prices on the stock to 100 pence per share.
The government had been expected to sell the shares in four tranches, leaving a year's gap between each sale, but the process could be accelerated should interest be keen. The U.S. offloaded $32 billion worth of shares in Citigroup (C.N) in 2010.
J.P. Morgan is advising UKFI and the Treasury on the sale.
Lloyds, JP Morgan and UKFI declined to comment.
(Additional reporting by Sinead Cruise and Anjuli Davies; Editing by Sophie Walker)