Private equity firm PAI Partners has pulled out of the race to buy Iglo Group, Europe's biggest frozen food company, leaving Blackstone and BC Partners as frontrunners for a company that could fetch 3 billion euros ($3.75 billion), banking sources said on Friday.

All three private equity groups had made it through to the second round of the sale by buyout peer Permira, but PAI had fallen short in its effort to join forces with a rival bidder or find another investor to help meet Permira's price expectation, banking sources said.

PAI declined to comment.

Rivals Bain and Clayton, Dubilier & Rice were cut from the auction process, which is being run by Credit Suisse, after the first round. [ID: nL5E8GLB2C]

There is a third party interested in Iglo, sources said. Charoen Pokphand Foods Pcl, Thailand's largest agribusiness company, has been seen as an interested party despite denying earlier reports it was attracted to the whole group. Some sources said previously it might link up with a private equity player in a joint bid.

Iglo started management presentations to bidders this week and will continue them into next week. Second round bids are due next month, bankers said.

A number of banks are working with Blackstone and BC Partners on debt packages to back the buyout of around 2.4 billion euros including around 400 million euros of undrawn debt. The financing could include around 550 million euros of subordinated debt in the form of mezzanine loans or high-yield bonds, bankers said.

Debt financing is likely to reach around 6 to 6.25 times the company's 325.8 million earningsbefore interest, tax, depreciation and amortisation (EBITDA) - slightly lower than the 6.5 times touted initially when the company first went up for sale - due to difficult economic conditions, bankers said.

Debt could include a mixture of sterling and euros, but the company could also seek U.S. liquidity if it is too tough to raise the full amount in Europe's volatile credit markets, bankers added.

Credit Suisse has also provided a staple financing package through a mixture of leveraged loans and high-yield bonds to back any buyout of Iglo.

Permira bought Iglo from Unilever in 2006 for 1.73 billion euros, backed by around 1.5 billion of leveraged loans, and later bought the remaining part of Unilever's European frozen food business, Findus Italy, in 2010 for 805 million euros, backed by 500 million of leveraged loans, according to Thomson Reuters LPC data.

Debt has since been reduced to 1.4 billion euros as of the end of 2011, the company said.

This article is copyrighted by Reuters