Ask the players when they want to intervene, and narrate until that point. Don't get bogged down in mechanics.
The normal flow of the game is for the DM to describe the scene/scenario, the players to declare their actions/intentions, then listen to the DM describe the result (with dice rolling as necessary). If the players choose to sit out of a conflict between NPCs, there isn't much else to do. The players are there to have fun, and if they want to sit out of a fight, they must not think that that fight would be fun, so hit the highlights and move on.
In my experience the best way to handle this is to make your best judgement on either what the outcome would be, or what it should be, either what makes sense or what makes the best story, then start describing how you get there from here. Roll one or two dice if you want help deciding some major turning points, but the story isn't about them, it's about the players, so keep it brief. Focus on the highlights and things of particular interest to the players.
If you're concerned that the players will want to intervene eventually, then describe the conflict in stages, giving the players easy/sensible times to do so. This can be done either explicitly, where you ask "Do any of you want to jump in yet?" or implicitly, where you pause and gauge the players by their expressions, body language and questions. If they still don't want to act, then move on.
In my opinion going through the full combat rules isn't necessary here. As DM you should be familiar enough with both the rules and the story to be able to make a sound judgement call on what the numbers should be if the players decide to surprise you during or after the fight. If the players do decide to jump in, reroll initiative from scratch, as the addition of a new fighting force is enough to throw everyone scrambling.
Remember that experience points should be granted for overcoming obstacles. If the players orchestrated events to cause one band of monsters to eliminate another, then I would reward that success. If this conflict was already in motion and the players sat idly by, then at least their time wasn't wasted while getting to the parts they were interested in.
I know that I've handled situations this way at least a few times, but the most recent was when I was running Sunless Citadel for a group of new players. They had formed a cautious alliance with the kobolds that are found earlier in the dungeon, and after softening up the goblins' defenses further in the kobolds drove the goblins out. My players, being both new and cautious, decided to stand back while a great melee broke out in the goblin warrens.
The players had moved on and taken out the hobgoblin chieftain, and then taken a look back at the rank and file. While I could have spent over an hour letting the mechanics play out, I instead decided that the side that the players' chose should win, and started describing the results. Within five minutes the players were back to the interesting bits: experience points, the hobgoblin's treasure, and this mysterious, vine-lined well (my players wouldn't let me call it a shaft) that descended deeper into the dungeon.