Preparations begin for one of the year’s largest flotations, which also includes Churchill and Green Flag motor rescue
Royal Bank of Scotland has kickstarted the flotation of its Direct Line insurance business and will earmark some of the shares for sale to private investors.
The sell-off – demanded by the EU in return for the £45bn taxpayer bailout of RBS – will be one of the largest flotations this year and is taking place at a time when stock markets are buoyed by central banks attempting to bolster economies by various forms of quantitative easing.
But hundreds of jobs are likely to be on the line as the insurer – which also owns Churchill, Privilege and the breakdown business Green Flag – aims to achieve targets to improve its profitability as a standalone company.
Paul Geddes, Direct Line’s chief executive, conceded that the need to save £100m by the end of 2014 would “sadly have consequences on the people we employ”. Some 891 job cuts from the 15,000-strong workforce were announced last week on top of a further 2,000 cut since 2010.
About a quarter of Direct Line is expected to be sold off initially to institutional investors, as well as to stockbrokers – led by Barclays Stockbrokers – who will help retail investors buy shares. This may disappoint those hoping for an advertising campaign similar to “Tell Sid” in the 1990s, but will allow some private investors to buy shares.
The details of management and employee bonus schemes will be outlined in a prospectus in the coming weeks although Geddes insisted there were would be no windfalls linked to the selloff itself.
RBS did not want to sell the insurance business, but must do so under terms set out by the EU when the bank was bailed out by taxpayers in 2008.
More than 50% must be sold by the end of 2013 and the entire group sold by the end of 2014. Stephen Hester, RBS chief executive, has indicated there could be tranches of sales.
The timing of the sale will prove crucial for its valuation, which is being estimated in a range as wide as £1.5bn to £4bn, and comes after another flotation of a German insurance company – Talanx – was pulled this week. This might depress the price RBS is able to achieve although Sandy Chen, banks analyst at Cenkos Securities, said: “We think that they can get the Direct Line IPO done before the QE rally fades. Any gains would likely be measured in the tens or hundreds of millions, though. As with the other banks, we expect that QE will boost banks shares for a little while, but we don’t think the longer-term investment outlook has improved.”
Geddes tried to distance Direct Line from Talanx. “80% of that business is reinsurance and life (insurance), so it’s a very different market,” he said. He also played down any rival offer from a private equity consortium which could scupper the flotation.
Direct Line has already handed £1bn to RBS this year – the first payment for a number of years – and is now promising a “progressive dividend policy” after its flotation.
Bruce van Saun, the finance director of RBS, which will ultimately decide on the timing of the flotation, said that even though the bank was a forced seller, Direct Line had a “strong future as a standalone insurance group”.
Taxpayers are currently sitting on a loss of about £20bn of their investment in RBS, whose shares rose 1.8% to 279p, well below the 500p average price at which the taxpayer bought them.
Credit Suisse analysts said the sale of Direct Line was “a further step down the road” for RBS, and that “investor attention may turn to the next elements such as exit of the government asset protection scheme”. Hester has said he wants RBS to exit the APS, which insures the bank’s most toxic loans, before the end of the year.
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