Sources confirmed private equity's interest in the business Monday, July 16, following a media report on Sunday. It was not immediately clear whether Blackstone and Bain would have further firms in tow, but the size of any likely bid would necessarily involve a hefty slab of cash and a consortium bid would require the backing of big banks comfortable with private equity club deals. The unit, which is Britain's largest personal motor insurer by number of policies, has been valued by analysts at about £4 billion ($6.2 billion).

"It's early days yet," said one private equity source on Monday.

The Sunday Times, of London, said a second fleet of large buyout firms including BC Partners Ltd., Kohlberg Kravis Roberts & Co. LP and Apax Partners LLP was considering a rival bid, although one person close to the situation questioned whether formal talks had taken place between the three. The firms might also consider working separately or with other co-investors.

Apax, for instance, has been reluctant to do club deals with other buyout firms in recent years, preferring to work together with its larger limited partners, such as the Canadian pension funds. A consortium of Apax and affiliates of Canada Pension Plan Investment Board and the Public Sector Pension Investment Board last year acquired San Antonio-based medical technologies company Kinetic Concepts Inc. in a deal valued at approximately $6.1 billion.

The London buyout firm, which has been raising a €9 billion ($11 billion) fund, targets deals with enterprise values of between €1 billion and €5 billion, which would place Direct Line within the top end of its range.

Royal Bank, which is 83% owned by the British government, said in February that it planned an IPO for later this year, and it still favors a listing as the best route for shareholder value, according to a source. Royal Bank hopes to benefit from improved market conditions to exit a profitable business without selling to buyout firms at a low price.

It pulled an earlier auction in 2009 after offers for Direct Line failed to reach what was then a target of over £6 billion. Valuations have fallen since then, but a return to profitability in 2011 may offer hope for better prices in the future. The insurance unit earned 2011 operating profit of £454 million, up from a loss of £295 million in 2010, despite a 5% decline in gross written premiums to £4.22 billion.

The Edinburgh bank must divest Direct Line to meet European Union state-aid conditions, imposed in 2009 after the lender's government bailout. It has until the end of 2013 to cut its holding below 50% and until December 2014 to exit the insurer completely.

Royal Bank's share was down 0.53% at 205.3 pence by early afternoon trading Monday.