The Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) may have to settle for a lower price, after Banco Santander, S.A. (NYSE:SAN) (MCE:SAN), of Spain, pulled out of a deal to buy its branches for £1.7 billion ($2.7 billion).

R.B.S. and Banco Santander, S.A. (NYSE:SAN) (MCE:SAN), which had been negotiating the deal for almost two years, announced Friday that they had failed to complete the multibillion-dollar deal for the branch network, due to a number of technical challenges.

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“Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) now has only 13 months to find another buyer, or float the business. Either way, we expect the revised price to be significantly lower,” said Espirito Santo analyst Shailesh Raikundlia. “The price set in Aug 2010 looks somewhat expensive now, the UK macro environment doesn’t look appealing in the medium term, and capital preservation ranks as a higher priority,” Raikundlia said.

The British bank, in which the government holds an 81 percent stake, after providing a bailout, is looking out for potential buyers for its 316 branches spread across Britain. Following the bailout during the financial crisis, R.B.S. had been ordered to sell the branch network, which has around 1.8 million customers. The sale of branches will help the bank to overcome the Continent’s debt crisis, which is looming large over the European banking sector. As a result of the crisis, European banks are subjected to stricter capital requirements that in turn hamper interest in the assets from rival firms; also the lending in the region remains weak, because of poor consumer demand for borrowing.

The potential buyers list may include Richard Branson’s Virgin Money, which also tried to buy the branches two years ago. The American private equity firm, J.C. Flowers & Company, whose founder, J. Christopher Flowers, recently moved to London, could also be interested in the assets.

An analyst with Liberum Capital in London expects the branch network to attract an offer of about £1 billion, while another analyst with Citigroup Inc. (NYSE:C), told the investors on Monday: “Even if alternative bids do materialize for the business, which remains uncertain, we expect they would be at much lower valuations than the original deal”.

The Edinburgh based bank may come up with an initial public offering for the unit, but as per analysts, investors might not be interested in such offerings, due to the negative sentiments for British-focused business. Last week, R.B.S. raised $1.3 billion through the listing of its insurance division, Direct Line.

What Does RBS Need To Divest? – This business consists of 316 branches and has around 2 million customers. In 2011 it accounted for around 4% of Group loans and around 5% of core Group PBT.

CitiGroup Research notes:

We expect that the EU Commission will insist that RBS still divests this unit, in order to facilitate competition. However, we would expect the EU to award an extension to the deadline. RBS can point towards the attempts it has made to successfully conclude this deal and the progress it has made on other mandated disposals. There is also a precedent. Both Commerzbank and KBC have been able to renegotiate parts of their own restructuring plans, including deadlines, with the EU. ING is also in discussion with the EU Commission.