By Claire Ruckin

LONDON, April 2 (Reuters) - Bahrain-based private equity firm Investcorp INBSCS.UL has pulled the sale of its German insulation firm Armacell INBSCE.UL and may instead refinance the company's debt and pay itself a dividend, bankers said.

It emerged last month that potential buyers Charterhouse CHCAP.UL , HgCapital HGT.L and Pamplona were likely to submit bids around 100 million euros lower than the 500 million euro ($642 million) price tag. ID:nL6N0CAC82

Charterhouse and Pamplona, which ended up submitting bids of around 400 million euros, were informed last week that these were too low and the company would not be sold, bankers said.

Bankers said Investcorp is now considering a dividend recapitalisation, a process that adds debt to a company's existing borrowings and enables a dividend to be taken from it.

Investcorp could mandate JP Morgan JPMKBM.UL to raise additional debt for Armacell via the high yield bond market that would be used for a dividend payment, one of the bankers said.

Charterhouse, Investcorp and Pamplona declined to comment. Barclays BARC.L , which was running the sale of Armacell, also declined to comment.

Dividend recapitalisations are becoming more common in Europe as a lull in mergers and acquisitions leads sponsors to look at other ways of getting value out of assets.

This year UK pet shop chain Pets at Home ID:nRLP91666a and Spanish metal packaging firm Mivisa ID:nL5N0CH2UO have both conducted dividend recaps. British payment processing company WorldPay is currently undertaking one ID:nL6N0CCH44 and tax-free shopping business Global Blue is considering this option. ID:nRLP86272a .

"With a lack of M&A, the easiest way to create supply and leverage up a performing asset is to conduct a dividend recapitalisation," one of the bankers said.

Armacell was bought by Investcorp in 2007 backed with 382.5 million euros of debt, according to Thomson Reuters LPC data. It says it is the world's largest maker of flexible insulation, claiming 40 percent of the market for products used to lag pipes and ductwork in buildings such as factories and schools.

The company has approximately 2,440 employees and 19 factories in 13 countries. Annual sales were around 448 million euros in 2011. ($1 = 0.7784 euros)

(Additional reporting by Arno Schuetze in Frankfurt; Editing by Ruth Pitchford)

((claire.ruckin@thomsonreuters.com)(+44)(0)(207 542 1891)(Reuters Messaging: claire.ruckin.thomsonreuters.com@reuters.net))

Keywords: ARMACELL LOANS/