RBS Begins Direct Line IPO After Talanx Scraps Stock Sale
Royal Bank of Scotland Group Plc, the U.K.’s largest state-owned lender, will push ahead with the initial public offering of its insurance unit even after Talanx AG, Germany’s third-biggest insurer, pulled its IPO this week.
RBS will offer a stake in Direct Line to institutional and, through intermediaries, individual investors, the companies said in statements today. The IPO may value Direct Line at 3 billion pounds ($4.9 billion) to 3.2 billion pounds, said Eamonn Flanagan, a Liverpool-based analyst at Shore Capital Group Ltd. (SGR)
RBS is trying to sell Direct Line, the U.K.’s biggest home and motor insurer, in stages to comply with a European Union ruling to offload the division by the end of 2014 as a penalty for the bank’s 45.5 billion-pound bailout in the 2008 credit crisis. Talanx called off its IPO for a second time in three months Sept. 13 after investors balked at the price.
“This will no doubt send shivers down the spines of RBS executives who had been banking on getting Direct Line’s IPO done at a decent price,” said Marcus Barnard, a London-based insurance analyst at Oriel Securities Ltd. The fact that the bank is a “forced seller” and the U.K. motor insurance market being “mature and cyclical” may lower the valuation, he said.
Direct Line won’t raise money itself in the IPO. RBS, which will start canvassing investor appetite for the stock today, plans to sell a 25 percent stake initially, according to a term sheet for the offering obtained by Bloomberg News. RBS is “committed” to selling a majority stake by the end of 2013 and all of its holding by the end of 2014 to comply with EU state- aid rules, according to the insurer.
RBS rose 1.9 percent to 279 pence in London trading, for a market value of about 32 billion pounds. The bank received 800 million pounds in dividends from Direct Line in the first half of 2012 and a further 200 million pounds earlier this month, RBS said in a statement Sept. 3.
The IPO may raise about 750 million pounds, based on Shore Capital’s calculations. That would make it the U.K.’s biggest since Glencore International Plc (GLEN) amassed $10 billion in May 2011. Companies have gathered $1.4 billion in London share sales this year, less than a tenth of the $15.6 billion they amassed in the year-earlier period, data compiled by Bloomberg show.
To lure investors, Direct Line said it will have a “progressive” dividend policy. The insurer plans to pay its 2012 dividend in the second quarter of next year. The payment will amount to between 50 percent and 60 percent of profit after tax from continuing operations, the firm said.
‘Lots of Interest’
“We’ve had lots of discussions with institutional investors for about a year and there’s a lot of interest,” Direct Line Chief Financial Officer John Reizenstein told reporters on a conference call today.
The insurer set itself a 15 percent return-on-equity target and said it will seek to pay out 98 pence in claims for every pound it takes in premiums next year. In the first half of 2012, it paid out 1.01 pounds for every pound of premium.
Talanx shelved its IPO this week after investors sought an “excessive discount” to the Hanover, Germany-based company’s own valuation, Chief Executive Officer Herbert Haas said.
Investors’ negativity toward Talanx may not affect Direct Line in the same way because RBS may be more flexible on price due to the requirement to sell, according to Ben Cohen, a London-based insurance analyst at Canaccord Genuity Ltd.
“The companies are competing for separate pots of money in different countries with different investment stories,” Cohen said. “Talanx would have used the money to grow in emerging markets whereas Direct Line has strong positions in U.K. household and motor insurance and a restructuring story.”
Direct Line, which has about 8.5 million mainly U.K. home and motor insurance customers, said profit rose 7 percent to 224.2 million pounds in the first half of this year. The company returned to profit last year after posting a loss in 2010 after a jump in motor personal-injury claims.
While private-equity firms expressed interest in Direct Line, none entered into formal discussions because of disagreements over price, people with knowledge of the discussions said Sept. 10. RBS had tried to sell the division before its bailout in 2008 for about 7 billion pounds, people with knowledge of the discussions said at the time.
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