RBS Announces Direct Line Flotation


LONDON -- Royal Bank of Scotland (ISE: RBS.L) (NYS: RBS) jumped 11 pence, or 4%, to 285 pence during early London trade this morning after announcing its Direct Line insurance subsidiary is to proceed with an initial public offering.

RBS said the offer would represent at least 25% of Direct Line's share capital, involve no new shares, and will be made available to institutional investors. In addition, RBS will offer some shares to intermediaries through which retail clients can participate.

Paud Geddes, Direct Line's chief executive, said:

"We are delighted to be announcing the intention to float Direct Line Group... We look forward to being a listed company and are more committed than ever to providing customers with excellent products and service levels, while seeking to deliver sustainable returns for our shareholders, targeting a 15% return on tangible equity from ongoing operations."

Direct Line may offer prospective investors some attractive features. In particular, the business claims to have a market-leading position in both home and motor insurance, with an 18% share of each and a total of 8.5 million in-force policies.

Furthermore, the business intends to pay between 50% and 60% of its post-tax profits as a dividend, as well as adopt a "progressive" payout policy. Direct Line expects to pay its first dividend in the second quarter of next year.

Something else worth considering is that RBS is essentially a forced seller of Direct Line. The flotation satisfies the commitment made to the European Commission after the bank received a taxpayer-funded bailout during 2009. RBS must sell Direct Line entirely before the end of 2014.

During the summer, various private-equity groups reportedly weighed up acquiring Direct Line, with a mooted price tag of between 3 billion pounds and 4 billion pounds. Such a market cap on flotation would catapult Direct Line straight into the FTSE 100 (UKX).

Direct Line's impending flotation could be one to watch, as industry rival Admiral rallied from a start price of 275 pence to as high as 17 pounds after its 2004 listing.

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Maynard does not own any share mentioned in this article.

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